GBP/CAD 4H

GBP: Markets believe that the landslide Labour victory could usher in a period of political stability that, coupled with the party’s supply-side reforms, could boost domestic investment. This, along with the start of the BoE’s easing cycle in the coming months and the continuing recovery of UK real incomes, could bode well for the UK economic outlook in H2 2024.Chief Economist Pill recently commented that it was “not unreasonable” to think the Bank Rate could be cut over the summer. However, he argued that services inflation is not a good metric for judging policy timing. Despite this, the potential risk remains that the BoE might cut rates in August even with high services inflation. An August rate cut could lead to some near-term GBP weakness as rate differentials narrow, given that the market has not fully priced in a 25bp cut.

As long as the BoE pursues policy easing cautiously, markets would likely continue to expect GBP outperformance over the medium term. This week, focus will be on the UK CPI, labor market, and retail sales data for May and June, which will be closely scrutinized for clues regarding the BoE's rate path in the coming months. Although Pill's latest comments slightly pushed back rate cut expectations, any deterioration in UK data will increase the odds of an August cut.

Additionally, the GBP appears slightly overbought according to CFTC Leverage Funds positioning data. With this in mind, any positive data surprises next week could encourage further reassessment of the BoE rate outlook and boost GBP rate appeal. Conversely, any negative data could lead to a quick unwinding of current positions.

CAD: The BoC cut rates at its June meeting, marking the start of the next stage in the Canadian monetary policy cycle and diverging from the Federal Reserve. This divergence might keep the CAD on the back foot as rate differentials weigh on the currency. Moreover, Canadian growth is recovering, past the worst but still with room for improvement. The outlook is heavily tied to the US economy’s cyclical strength.

Recent comments from Powell, along with the lower-than-expected US June CPI, support the argument that the Federal Reserve can start loosening monetary policy this quarter. Since the CAD often trades as a proxy for the USD, expectations of a US economic slowdown could further weigh on the CAD in the near term.

In the week, the Canadian June CPI report will play a crucial role in determining whether the BoC will implement a further cut at its July meeting. The prior statement noted that the BoC agreed policy no longer needs to be restrictive and that recent data increased their confidence that inflation will continue to move towards the 2% target.

However, the BoC remained aware that inflation risks persist. The inflation print in May was hotter than expected, but the BoC's core measures remained within the upper end of the BoC’s inflation target of 1-3%. However, the June labor market report was very weak, with a rising unemployment rate and an overall employment decline of 1.4k. If inflation cools in June, it will likely endorse another BoC rate cut, particularly when coupled with a rising unemployment rate.

FX View:

DXM: A Tool to Gauge Retail Sentiments

GBP/CAD Current Retail Long/Short Position

The DXM shows that 4% of traders are bullish, while the remaining 96% 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.

Seasonality Analysis: The Historical Movement of the Currencies  

GBP Futures’ seasonality movement

The seasonal pattern for the GBP suggests bearish momentum in the near term but the latest economic development in UK is not favor with this bearish seasonal pattern.

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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