Pound-to-Canadian Dollar Week Ahead Forecast: Eyes on 1.8830 and Above

The pound retains a bullish setup against the Canadian Dollar ahead of Bank of England and Bank of Canada decisions.

Last week saw the pound to Canadian dollar exchange rate (GBP/CAD) slice through an important resistance zone at 1.8698-1.8742 as it furthered its uptrend.

We see that uptrend staying intact this week, which should mean 1.8830 and fresh multi-year highs are delivered.

The technical signals are advocating for further gains, and this bullish setup will likely find sustenance from a Bank of Canada rate cut that contrasts with a decision to leave rates on hold in the UK.

"CAD has actually weakened further, driven by the softer domestic backdrop. The latest employment report raised expectations for BoC cuts this year and deepened terminal rate pricing," says a weekly foreign exchange strategy note from Goldman Sachs.

Goldman Sachs thinks the Bank of Canada will cut by 25bps this week and deliver a total of two more cuts this year.

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i - Based on average GBP/CAD rate observed in July.

If the Bank of England keeps interest rates unchanged on Thursday and validates market expectations by keeping rates on hold for the remainder of the year, then a powerful fundamental narrative for further GBP/CAD gains stays in place.

This is because interest rate differentials are one of the primary drivers of currency valuation, and those currencies commanding higher interest rates tend to outperform those with lower interest rates.

The Bank of England does not have the luxury of cutting interest rates as far and fast as its Canadian counterpart owing to the UK's elevated inflation rates. Where Canada has a rate of 1.7% y/y, the UK is expected to see its equivalent measure rise to 3.8% this week.

Inflation data are due Wednesday and the rule of thumb is that the GBP would find a lift if the figures beat epectations. On the other hand, an undershoot could crimp Sterling's advance.

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The Bank's decision on Thursday should be a relatively uneventful affair on the rates front: not rate cut and little appetitite to deviate from the guidance we have seen over recent times: i.e. the Bank remains attentive to the data.

This status quo would underpin the notion that the Bank can't cut rates too much further, and any GBP weakness that follows the inflation and/or Bank of England decision should soon fade, ensuring the GBP/CAD route higher remains unencumbered.

The major risk for Sterling remains the UK's budget position, but with the November budget still some way off, foreign exchange will likely remain focussed on the currency's rate advantage.