Image source: Bank of Canada.
The Canadian dollar defends a key line against the pound, and the Bank of Canada will do the same in its midweek policy update.
The pound to Canadian dollar exchange rate (GBP/CAD) trade will be determined by another failure at the mighty 1.87 resistance barrier on Friday, which has opened the door to a deeper retreat in the coming days.
CAD hit back against GBP and other major currencies following the release of a significantly above-consensus local jobs report that revealed 87,800 jobs were added to the economy in May.
The figure breezed past estimates for 10K and coincided with an equally powerful jobs report south of the border, giving a bullish flavour to the North American currencies that could allow for further advances in the coming days.
For GBP/CAD, the jobs report coincided with another test of the 1.87 barrier, a level which looks to be as firm as ever. Multiple rallies have stalled in the 1.8670-1.8700 region since early 2025, and the latest rejection from resistance reinforces the significance of that ceiling.
While repeated tests can weaken resistance over time, the market has yet to demonstrate it can sustain a break into new territory.
The failure should allow the GBP/CAD pair to retreat back to the 100-day moving average at 1.8488 in the near-term.
For future CAD price action, much will depend on what the Bank of Canada does this week.
"The Bank of Canada (BOC) is widely expected to keep the policy rate on hold at 2.25% for a fifth straight meeting," says Elias Haddad, strategist at Brown Brothers Harriman.
He explains the BOC is also poised to stick to its two-way policy optionality introduced in April that new US trade restrictions on Canada would argue for cuts, but persistently high energy prices could warrant "consecutive increases in the policy rate."
The swaps curve now prices 50bp of rate hikes over the next twelve months. For CAD, what matters is how the BoC verifies or pushes back against that pricing in Wednesday's update.
Verify, and the CAD strengthens; push back, and the currency weakens.
"We expect the Bank of Canada (BoC) to keep rates on hold at 2.25%. Although markets see some potential for a hike later in the year, we do not believe this is very likely," says a note from UBS. "With trade uncertainty remaining elevated, we expect the CAD to face headwinds in the near term."
"In our view, Canada’s contained inflation backdrop gives the BOC scope to keep rates on hold for an extended period and assess whether the rebound in May employment and April real GDP is sustained," says Haddad. "There is room for BOC rate hikes bets to adjust lower against CAD."
Such a development would limit any GBP/CAD downside potential in the coming week.