GBP/CAD shows signs of stabilisation but upside limitedScope to hold above 1.57 if USD/CAD remains elevated But could struggle to extend beyond 1.59 in short-termSofter CAD helps GBP/CAD but GBP remains headwindUK, CA CPI eyed with PMIs, retail data also key for GBP

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The Pound to Canadian Dollar exchange rate is showing signs of stabilisation following a multi-month decline and could be likely to hold above the nearby 1.57 level in the days ahead, although much depends on price action in USD/CAD as well as economic figures emerging from the UK and Canada.

Pound Sterling eased lower against the Canadian Dollar on Monday but remained more than one percent higher for the recent week after drawing a bid from the market following last Thursday’s update to the Bank of England’s (BoE) interest rate guidance.

The BoE raised Bank Rate for a fifth time in June, from 1% to 1.25%, and adopted guidance similar to the Bank of Canada’s (BoC) when saying it would be prepared to act more forcefully - seemingly with larger increases in the cash rate - if necessary.

This prompted a bid for Sterling and helped lift the Pound to Canadian Dollar exchange rate sharply but the almost 400 point increase in GBP/CAD last Thursday was also driven by a steep fall in the Canadian Dollar, which fell briefly to 0.7650 as USD/CAD took a look above 1.30.

“Last week’s close was above the 1.30 mark for the first time since late-2020, but the 1.3077/80 area remains a key barrier to the upside,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

Above: Pound to Canadian Dollar rate shown at daily intervals with USD/CAD and spread or gap between 02-year UK and Canada government bond yields. Click image for closer inspection.

“We’re updating our expected range to be in the 1.2700-1.3300 over the coming period,” Rai and colleagues said of USD/CAD on Monday.

While last week’s decision prompted a steep increase in market expectations for the BoE’s Bank Rate at year-end, which likely played a role in lifting Sterling, much about the GBP/CAD outlook is also hinged on price action in USD/CAD and notably whether or not it holds above 1.28 this week.

“We would not preclude more downside pressure on spot in the short run at least as the USD consolidates gains. Look for support at 1.2940/50 intraday. 1.2665/85 is key support on the downside; USD weakness below this zone would point to deeper, corrective losses,” says Shaun Osborne, chief FX strategist at Scotiabank, in reference to USD/CAD.

The Pound to Canadian Dollar rate tends to closely reflect the relative performance of Sterling and the Loonie when each is measured against the U.S. Dollar and would be likely to remain supported above 1.57 - which is itself some distance above the year’s lows - if USD/CAD holds 1.28 this week.

Above: GBP/USD at hourly intervals with Fibonacci retracements of last week’s corrective rebound indicating possible short-term areas of technical support for Sterling, and shown alongside USD/CAD. Click image for closer inspection.

This is assuming that Sterling can also retain some of its recent advance against the U.S. Dollar, however, and whether that happens or not is likely to depend on the outcome of Wednesday’s UK inflation figures as well as PMI surveys and retail sales data due on Thursday and Friday.

“We think CPI inflation held steady at 9.0% in May, with a drop in core inflation countering rises in food and energy inflation,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics, who looks for UK inflation to come in lower than market expectations.

“We look for a -0.7% month-to-month print for retail sales volumes, including petrol, in May,” Tombs also said of Friday’s retail sales figures, which the consensus sees falling by -0.6%.

Sterling and GBP/CAD could benefit this week if Wednesday’s inflation figures surprise on the upside of market expectations but would risk fresh losses if Thursday’s PMI surveys of the manufacturing and services sectors or Friday’s retail sales data underwhelm already pessimistic expectations.

Above: Pound to Canadian Dollar rate shown at weekly intervals with Fibonacci retracements of February fall indicating possible areas of technical resistance for Sterling. Click image for closer inspection.

“There are two key events this week and both of them are on Wednesday. First, the May CPI number is out in the morning and we’re expecting a +1.0% m/m gain (or +7.3% y/y),” CIBC’s Rai said of the Canadian economic calendar.

“This will be the first release with the 2021 basket weights – with increased weights for shelter-related costs include homeowner replacement costs and other owned accommodation costs. Second, BoC Senior Deputy Governor Rogers hosts a fireside chat in Toronto later that morning,” he added.

The Pound to Canadian Dollar exchange rate will also be susceptible, however, to the possible implications of a further surge in Canadian inflation when the data for May are released on Wednesday, which could prompt a more forceful interest rate response from the BoC as soon as its next meeting.

The danger is that such an outcome lifts the Canadian Dollar and weighs on USD/CAD, keeping GBP/CAD suppressed near to or below Monday’s levels.

Above: USD/CAD shown at weekly intervals with Fibonacci retracements of 2020 fall indicating possible areas of technical resistance for U.S. Dollar and support for Canadian Dollar. Click image for closer inspection.