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

GBP/USD falls as the UK contracts in December

GBP/USD is falling amid USD strength and as investors digest the latest UK GBP data.

UK Q4 GDP stalled at 0% after contracting -0.3% QoQ in Q3, meaning that the UK economy narrowly avoided a recession in the final three months of the year. However, on a monthly basis, GDP contracted 0.3% MoM, a slowdown that was likely the result of strikes across the country.

The near-term outlook remains depressed as household incomes are squeezed by high inflation and rising interest rates. According to BoE Governor Andrew Bailey, inflation isn’t expected to start falling significantly until the second half of the year, which means that a sustained recovery will start taking place much later in the year.

Recession fears, along with ongoing strikes and Brexit concerns, could keep the pound weighed down.

Meanwhile, the USD is pushing higher in risk-off trade and after a slew of hawkish Fed speakers across the week. Attention will now turn to the US Michigan consumer confidence.

Where next for GBP/USD?

GBP/USD rebounded lower from 1.2450 last week, falling below the 50 & 100 sma and the multi-month rising trendline support.

The price found support on the 200 sma at 1.1960, which now acts as the hurdle below which bears need to push the price in order to create a lower low. Below here 1.1840 the 2023 low comes into play.

On the upside, buyers could look for a rise over the 50 sma at 1.2185. Beyond here the rising trendline resistance at 1.2290 could come into play ahead of the 1.2440 2023 high.

USD/CAD looks to US consumer confidence & CAD jobs data

USD/CAD is holding steady, around 1.3450, after two days of gains, as investors look ahead to US consumer confidence data and the Canadian jobs report.

The US dollar has risen this week after Federal Reserve policymakers, including Chair Jerome Powell, have suggested that US interest rates need to rise further in order to rein in inflation which is still over three times the feds target level.

U.S. Michigan consumer confidence is expected to rise to 65 in February, up from 64.5 in the previous month. Consumers have so far had a bright start to 2023 as inflation cools and financial conditions improve. Rising consumer confidence could fuel hawkish Fed bets.

Meanwhile, falling oil prices are keeping the loonie pressurized ahead of the labour market report. Expectations are for a tick higher in unemployment to 5.1%, from 5%, and the change in employment is expected to rise 15k after 104k in the previous month.

The data comes after the BoC indicated that its rate hiking cycle could have finished. With this in mind, a much stronger jobs report, particularly wage growth, could reignite rate hike bets and boost the CAD. Meanwhile, a softer jobs report could weigh on the loonie, particularly if US consumer confidence rises.

Where next for USD/CAD?

After breaking out of a falling wedge pattern, USD/CAD is consolidating around weekly highs. The RSI is above 50, supporting further gains.

Buyers could look for a rise over 1.35, the 50 sma, and January 18 high to extend the bullish run towards 1.3685, the 2023 high.

On the flip side, a break below 13350, the weekly low, could expose the 100 sma at 1.3270 and 1.3235 ,the 200 sma. A break below here would be significant given that the price has traded above the 200 sma since June last year.