GDP figures due on Wednesday (12:30 GMT) are expected to show that growth in the Canadian economy likely accelerated in the first quarter of 2023. The report will be the last major one before the Bank of Canada’s June 7 policy meeting. After a string of better-than-expected data lately, can upbeat GDP numbers sway policymakers to resume their rate hiking cycle? For the Canadian dollar, though, which has been rangebound against its US counterpart all year, there might be some short-term gains from a solid report.

Is the slowdown over?

Canada’s economy stagnated at the end of 2022 as higher inflation and interest rates started to bite for consumers and inflicted pain on the housing sector. Businesses, meanwhile, drew down their inventories and economic output as a whole was unchanged from the prior quarter.

The jobs market on the other hand has remained surprisingly buoyant and is supporting households amid the restraint on spending from rising borrowing costs. Exports are also estimated to have performed strongly between January and March, and even the housing market appears to be bottoming out.

For the quarter, GDP is expected to have expanded by an annualized 2.4% rate compared to the prior three months, signalling a return in growth momentum. But would a pickup in the economy necessarily be good news for policymakers?

An economic rebound might not be so welcome

The labour market is showing no sign of slowing down and with the unemployment rate at decade lows and wage growth running above 5%, there’s a risk that things could heat up even more. There are similar risks for the property sector. Despite the steep downturn in 2022, the bubble may not have popped just yet as there is some evidence suggesting that the lower prices are reviving demand as some houses become affordable again.

But what the Bank of Canada is probably most worried about is the fact that headline CPI unexpectedly edged up in April, rising to 4.4%. Although it is too early to jump to any conclusions from one month’s data and underlying measures of inflation continue to head lower, it is something the Bank will be watching very closely.

The BoC expects the bounce back in Q1 GDP to be short lived and that growth in the rest of the year will be rather weak. If that does not turn out to be the case, there’s a strong possibility that policymakers will be compelled to restart their tightening campaign.

Loonie eyeing one more rate hike by BoC

Expectations of one additional 25-basis-point rate hike in 2023 have been gathering pace lately so faster-than-expected GDP growth in Q1 could further boost those odds, lifting the loonie.

Dollar/loonie could seek immediate support in the C$1.35 region from any rally in the Canadian currency. This is also the 38.2% Fibonacci retracement of the August-October 2022 uptrend. If broken, traders might next target the recent troughs around C$1.33.

However, if the GDP data underwhelms and the greenback is still broadly on the front foot, dollar/loonie could aim for the C$1.37 level slightly above the 23.6% Fibonacci before having another go at the March peak of C$1.3861.

In the bigger picture, the pair has been consolidating since October 2022, but looking more closely, it has been developing within a symmetrical triangle. This puts a potential breakout on the radar, although that could still be months away.