GBP/CAD supported near 1.6452 & 1.6374 further downGains above 1.6660 needed for recovery trend to extendUpside risk if BoE leaves door open to higher Bank Rate

Image © Pound Sterling Live

The Pound to Canadian Dollar exchange rate is the worst performing Sterling pair of the week but with the backdrop on the charts still bullish a Bank of England (BoE) interest rate decision in the pipeline, GBP/CAD could yet attempt a recovery ahead of the weekend.

Canada's Dollar remained one of the top performing currencies in the G10 basket during January including in the wake of last week's Bank of Canada (BoC) interest rate decision, which has so far prevented GBP/CAD extending a multi-month recovery from last September's record low.

This leaves Sterling at a potential inflection point ahead of Wednesday and Thursday policy decisions from the Federal Reserve (Fed) and BoE, while some analysts still retain bullish outlooks for the Canadian Dollar.

"The latest round of CFTC position data continues to flag that the market is underweight CAD – which implies that the risks remain skewed for the loonie. For USD/CAD, that means to the downside," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

"We remain of the view that strength there should be faded as we envisage 1.3300 giving way ahead of a test of the 1.3230 area. Given the constructive macro backdrop, we like building CAD longs on the crosses as well – particularly against the GBP," he adds.

Above: GBP/CAD at daily intervals with selected moving averages and Fibonacci retracements of September 2022 and November 2022 recoveries indicating possible areas of technical support for Sterling. Click image for closer inspection.

Wednesday's Fed decision will matter for all currencies and would potentially keep GBP/CAD under pressure into Thursday's BoE event if the Federal Open Market Committee makes a determined effort to reverse recent declines in U.S. bond yields and gains for risky assets.

These have been prominent drivers of the downward correction in the U.S. Dollar and that in turn helped to fuel the Pound to Canadian Dollar rally through November and early December last year, although since then Sterling has struggled for traction.

"GBPCAD continues to consolidate also. The Jan range—a potential bull flag—is playing out amid weakening trend momentum and sterling’s struggle to make progress through key short-term (bull trigger) resistance at 1.6660," says Shaun Osborne, chief FX strategist at Scotiabank.

"A clear move above this point would signal another major leg higher in the GBP was unfolding after the strong rebound from October’s major low," he writes in a Monday review of the Canadian Dollar charts.

The Scotiabank team said previously that 1.70 would become a viable target for GBP/CAD if technical resistance around 1.6660 is overcome.

Above: Pound to Canadian Dollar rate shown at weekly intervals with selected moving averages and Fibonacci retracements of 2022 downtrend indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

GBP/CAD's short-term prospects also likely depend in no small part on Thursday's decision from the BoE, and what it says about the outlook for Bank Rate following a widely expected decision to raise it from 3.5% to 4%.

"With the latest credit and money supply data to hand, we find it difficult to believe that the BoE will get close to the degree of hawkishness expected this week from the ECB and the Federal Reserve," warns Stephen Gallo, European head of FX strategy at BMO Capital Markets.

"We look for a 25bps rate hike from the BoE on Thursday (less than the consensus)," he adds in Tuesday market commentary.

Forecasts for UK economic growth are set to be upgraded on Thursday but its projections for inflation are expected to be cut so there is uncertainty over what the BoE might say of the outlook for borrowing costs going forward.

Sterling would be at risk of losses if the BoE raises Bank Rate less than expected or signals or signals an imminent end to its interest rate cycle.