We are heavily bearish the GBP against the USD and also in the crosses – in articles last week we looked at GBP/USD and GBP/CHF and in this article, we will look at GBP/CAD.

In terms of the CAD it's heavily correlated with US strength and weakness – we have seen a sell-off in terms of GBP/CAD speculators are heavily long and we are now looking for the GBP to turn lower on inflation data this week...

UK And Canada Inflation Data

We have inflation data out of Canada this week on Tuesday. Markets expect a 2.8% year-on-year reading for April which will firm expectations for a rate cut at the Bank of Canada in June. "Absent an upside surprise, we think the soft conditions in the economy and labor markets should warrant a 25-bps interest rate cut from the BoC." (Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada.) This is already factored into market pricing so should have limited impact on price action.

Over in the UK, The market expects CPI inflation to fall to 2.1% year-on-year in April from 3.1% in March, and the core inflation rate to fall to 3.7% from 4.2%. The market only sees a 14% chance of a rate cut in August – we think the odds are higher. You can read more about our view on UK inflation Here

We think the good news could be in for GBP/CAD and expect the market to increase the odds of an August rate cut in the UK which will send the GBP lower.

Sentiment

On the COT Net Traders Positions, large speculators hold a 9.1 position in terms of longs over shorts while commercials “smart money hedgers” hold 5.4 to 1 in terms of shorts over longs making the divergence 14.5. Regular viewers will know any divergence above 10.00 will get our attention if it's backed up by a good technical setup and this exists in GBP/CAD.

Technical Analysis

Our view of the key technical levels of support and resistance to look out for below.