Summary:

As UK April Inflation show stronger than expected, now market is pared back the BoE rate cut expectation in June. In contrast, the continued slowdown in Canadian inflation provides more confidence for a rate cut by the BoC in June, highlighting a clear policy divergence between the BoE and the BoC.

GBP/CAD 4H

Macro View:

GBP: The UK April inflation report came in hotter than expected, with services inflation at 5.9%, exceeding both consensus estimates of 5.4% and the BoE’s projection of 5.5%. While headline inflation slowed from 3.2% to 2.3% and core inflation from 4.2% to 3.9%, these figures were still above consensus. The BoE is particularly focused on services price dynamics, which saw notable increases, including a surge in rents. This report reduces the likelihood of a rate cut in June and delays the start of the BoE’s rate cut cycle. The still high yields in the UK will likely encourage a stronger pound in the near term. Moreover, the April inflation report is prompting investors to reassess the timing and magnitude of BoE easing this year, enhancing the GBP’s carry appeal. As a result, markets believe that the GBP should remain a buy on dips, as the data supports growing expectations of further economic recovery in the UK.

CAD: The Canadian rate market now anticipates a higher probability of an earlier rate cut from the BoC following the release of April's inflation data. The report revealed that core inflation surprised to the downside for the fourth consecutive month this year. The average of the core CPI measures (trim & median) slowed further to an annual rate of 2.8% in April from 3.1% in March. With inflation moving closer to the BoC’s target and Canada's economy growing below potential, there is now room for the BoC to make their policy rate less restrictive. As a result, markets expect the first BoC rate cut at the June policy meeting

FX View:

DXM: A Tool to Gauge Retail Sentiments

GBP/CAD Current Retail Long/Short Position

The DXM shows that 4.5% of traders are bullish, while the remaining 95.5% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

GBP Futures’ seasonality movement

The seasonal pattern for the GBP suggests bullish momentum in the near term.

CAD Futures’ seasonality movement

The seasonal pattern for the CAD suggests bearish momentum in the near term.

Sources: Prime Market Terminal

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