Image © Bank of Canada
The Pound could be at risk of further weakness against the Canadian Dollar in the coming days.
Our Week-Ahead Forecast for the Pound-to-Canadian dollar exchange rate looks for a potential bounce back to the nine-day exponential moving average (EMA), which is currently at 1.8417, in the first half of the week.
However, the balance of risks is that the exchange rate will be lower by the end of the week than where it started trading on Monday.
GBP/CAD broke below the nine-day EMA last Thursday, which set up the conditions for further near-term weakness, which was subsequently delivered through the Friday and Monday sessions, ahead of the buying interest we are seeing on Tuesday.
For now, strength in GBP looks relatively limited and is most likely a mean-reversion back to the nine-day EMA, which is entirely consistent with the magnetism that this monentum indicator has on short-term price action.
The big downside risks for GBP/CAD come in the form of Thursday's Bank of England interest rate decision, where another 25 basis point interest rate cut will be forthcoming.
Above: GBP/CAD at daily intervals.
There is a lot of chatter in the analyst community that the conditions are in place for the Bank to cut interest rates again in June, which will need to be communicated in Thursday's decision and guidance.
That would mark a 'dovish' shift in communications from the Bank, which has thus far been content to cut at a quarterly pace. A shift to back-to-back cuts would weaken the Pound further.
"The prospects for faster BoE cuts seems increasingly likely. Our economists are now expecting a switch to a sequential pace of cuts from here, putting our year-end BoE call as further below market pricing than any other G10 central bank," says a note from Goldman Sachs.
With this in mind, there is a decent chance that the deterioration in the GBP/CAD trend yields further weakness in the coming days and a test of 1.83 is likely, ahead of further weakness to 1.81 by next week.
"The relatively shallow pricing of BoE cuts leaves Sterling vulnerable to further declines in global yields in our view," says Goldman Sachs.
That being said, there is nothing to suggest a major breakdown in GBP/CAD is imminent, and the bigger trend still remains to the upside.
What we are seeing, as is the case with other major GBP exchange rates, is that a more meaningful pullback in the multi-year run of appreciation is developing.
The major risk for the CAD is that the North American economies falter under Donald Trump's tariffs. Because Canada is so tightly linked to its southern neighbour, any slowdown there inevitably hurts, even if Trump's tariffs are whittled down through negotiations.