GBP/USD, USD/CAD forecasts: Two trades to watch

GBP/USD rises ahead of US inflation data, BoE’s Bailey

• IMF forecasts 0.3% contracting for UK in 2023
• US CPI expected to cool to 5.2% YoY
• GBP/USD needs to rise above 1.2450 to extend gains

GHBP/USD is rising for a second straight session as investors shrug off the dismal IMF forecast, which sees the UK economy contracting by 0.3% in 2023, the worst performing G20 countries, as inflation remains elevated.

BoE Governor Andrew Bailey is due to speak twice today, and investors will be watching for clues over the future path of rate hikes.

However, the main focus will be on US inflation which will set expectations for the May FPMC meeting.

CPI is expected to cool to 5.2% YoY, a 17-month low, down from 6% in February. However, core inflation is expected to be stickier and actually rise to 5.6% YoY, up from 5.5%.

Heading into the meeting, the market is pricing in 66% probability of a 25 basis point rate hike in May. Should inflation, particularly core inflation, which is still 2.5 times the Fed’s 2% target, prove to be stickier than feared, then rate hike bets could rise, lifting the USD.

Where next for GBP/USD?

GBP/USD trades above its month-old rising trendline, which combined with the bullish RSI and the supportive moving averages, keep buyers hopeful of further gains.

The pair trades just below 1.2450 a resistance level that has capped gains on several occasions since November. A rise above this level is needed to extend the bullish run up to 1.2525, the April high. Beyond here 1.2667, the May high.

On the downside, a move below the rising trendline opens the door to support at 1.2290, the April low, which could offer strong support. A break below here exposes the 50 & 100 sma at 1.2185.

USD/CAD falls ahead of BoC & US CPI

• BoC expected to keep rates on pause at 4.5%
• Could signal it is prepared to hike again if needed
• USD/CAD tests multi-month rising trendline

USD/CAD is falling for a third straight session amid USD weakness, rising oil prices and as investors look ahead to the BoC interest rates decision.

The BoC It's widely expected to leave interest rates at 4.5% as inflation cooled to 5.2% . The continued pause will give the central bank the opportunity to assess the impact of its steep rate hiking cycle on the economy.

Despite inflation falling to its lowest level in 13 months, economic data keeps surprising to the upside. The jobs market remains hot with abundant vacancies, and wage pressures remain strong. Early estimates point to economic growth of 2.8% defying predictions of a stalling economy or possible recession.

As a result, today’s meeting could see the central bank say that it is prepared to resume lifting interest rates if necessary.

Oil prices also continued to support the loonie, jumping 2% yesterday as the market considers that peak US interest rates are near, and despite data showing a surprise build in inventories.

In addition to the BoC and oil prices US inflation data is likely to be a key driver for the pair and less so the minutes to the March FOMC.

Where next for USD/CAD?

USD/CAD trades around a weekly low and is testing the multi-month rising trendline. Sellers could look for a meaningful move below this support, which exposes the 200 sma and the April low at 1.34. Follow-through selling from here brings 1.3325 the January low into target ahead of 1.3260 the 2023 low.

On the flip side, any meaningful recovery would need to rise above 1.35, the psychological level to attack 1.3540-60 resistance zone, the 50 & 100 sma, and the weekly high.