The GBP is the second most oversold major currency in our view behind the JPY but the GBP has started to show some strength in the crosses and we view it as a buy on the commodity currencies and our favorite from a risk-to-reward point of view is GBP/CAD.
We think the market is underestimating how quickly the Bank of England will raise rates and below we can see market expectations for rate rises in the UK and Canada below.
Interest Rate Outlook
“The Bank of England has kept the door firmly ajar to a 50bp rate hike in August, and whether it follows through with this will in part depend on whether we get another upside inflation surprise next week.” (ING THINK)
There will be no big fall in inflation and the market view that the Bank Of England will hold off on rate rises due to fagging the possibility of recession is misplaced.
UK inflation is high and won’t be coming down any time soon and a rate of 2.5% is too low in our view. We also think the Bank of Canada will fail to deliver the expected market rate hikes due to the housing market and the impact on mortgages but even if they do hit market expectations aggressive rate hikes are discounted.
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Global Economic Slow-up and Risk-Off
The CAD is more sensitive to the outlook for the global economy than the GBP as Canada is a major commodity producer and it’s clear that the global economy is slowing which means lower commodity prices which will weigh on the CAD.
As we noted in a recent article crude oil prices are above fair value and we expect them to fall back which will add to downside pressure on the CAD.
Also, we have a nervous market and stocks are down. If risk-off gathers pace this will weigh on the CAD more than the GBP.
The bad news is discounted for the GBP and the good news is priced in for the CAD. We have seen some strength in GBP/CAD and expect more to come.
Technical Analysis
On the chart below the GBP has moved up from daily chart lows and we now expect a breakout above the 1.600 level to follow through up to resistance at 1.6400 as the GBP corrects its oversold condition. Stop protection should in our view be behind support and the 20-day moving average.
