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

GBP/USD rise after UK GDP, US CPI next

 

The pound rises back above 1.19 after dropping 1% earlier in the week.

GBP is being lifted by an unexpected rebound in the UK economy. UK GDP rose 0.5% MoM in May, defying expectations of  0% growth forecast and comes after two months of contraction and amid the ongoing cost of living crisis.

Delving deeper into the data, travel agencies, road haulers, and GPs were strong growth drivers, and manufacturing also saw widespread growth after several weak months.

The BoE still expects the UK economy to contract in the April to June quarter before rebounding in Q3. Although with inflation set to rise to 11%, a recession is looking increasingly more likely.

Gains in the pound could be short-lived as attention turns to US CPI data later today, which is expected to rise to 8.8%, a fresh 4-decade high.

Hot inflation could fuel bets of a more aggressive Fed and lift the USD, pulling GBP/USD lower.

Where next for GBP/USD?

 

GBP/USD has traded within a descending channel for much of the past three months. The pair dropped to a low of 1.18 which should now be treated as immediate support. The RSI is supportive of further downside while it remains out of the oversold territory.

A break below 1.18 is needed to extend the bearish trend towards 1.1780, the lower band of the falling channel.

On the upside, buyers will need to retake 1.2180, the 20 sma, and the July high in order to target 1.23, the 50 sma, and the upper band of the falling channel.

 

USD/CAD looks to BoC rate decision

 

USDCAD rose yesterday on the back of a strong USD and as CAD tracked oil prices lower. Oil fell over 8% on a weakening demand outlook as recession fears rose and COVID cases in China rose.

Today the pair is holding steady ahead of the BoC interest rate decision. The BoC is expected to raise interest rates by 75 basis points, which would be the largest rate hike in 24 years, taking the benchmark rate to 2.25%.

The BoC has already hiked rates by 50 basis points in April and June as it fights to contain 4-decade high inflation. With unemployment at a record low and a hot housing market, combined with a more resilient economy owing to the commodity sector, the BoC is likely to sound hawkish, even as they lower growth forecasts.

Where next for USD/CAD?

 

USD/CAD has seen a steep rebound from 1.2510, the June low, running into resistance at 1.3085 for a third time.

The pair has found support on the 20 sma, which, combined with the bullish RSI, keep buyers hopeful of further upside.

Buyers will need a move over 1.3085 to book a higher high and approach 1.31.

Sellers will look for a move below the 20 sma at 1.2950, to bring 1.29 the March high into target. It would take a break below 1.2850 the 50 sms and July low to create a lower low.