Pound to Canadian Dollar Week Ahead Forecast: Holding Strong Into Bank of Canada

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The Pound to Canadian Dollar exchange rate (GBPCAD) looks constructive heading into this week's UK budget and Bank of Canada policy decision.

GBPCAD appeared to have peaked at 1.7220 on Thursday as a two-week run of uninterrupted gains uptrend finally failed.

We note that this level has coincided with major pullbacks in the past (four since the start of 2023), but Thursday's selloff was followed by a retracement higher into the weekend, and Monday sees the recovery extend.

To be sure, the Thursday loss has not been fully retraced, but the fact that the market has yet to see follow-through selling suggests another attempt at the 1.7220 high could occur in the coming week.

Above: GBP/CAD at daily intervals. Track GBP/CAD with your own custom rate alerts. Set Up Here

Notably, the market is above the 9-day simple moving average, as per the above, which has been quite useful in explaining short-term trends since mid-2023. Should the pair break below here for at least two successive days, we would expect the exchange rate to roll over and move lower.

Momentum is still to the upside as the pair trades above the more significant 50, 100 and 200 DMAs, with the ADX turning higher in February and still advocating for gains. The RSI is firm at 61.50.

The Bank of Canada's policy decision midweek (14:45) will form the main risk event for the Canadian Dollar this week.

The key story from the last Bank of Canada's policy meeting in January was the removal of the line that the Bank "remains prepared to raise the policy rate further if needed".

Data has been mixed since that meeting as Q4 GDP, jobs data and retail sales were stronger than expected, but January's GDP was weaker than expected, and crucially, so was inflation.

Inflation undershot expectations with headline CPI down to 2.9% in January from 3.4% in December (consensus was 3.3%) with core inflation rates slowing to 3.3% for the median and 3.4% for the trimmed versus the 3.6% rates that were expected.

"Softer CPI could prompt the BoC to sound more optimistic on disinflation and start hinting at monetary easing more explicitly at the March meeting. Given the rather conservative market pricing on BoC rate cuts, we think the balance of risks is tilted to the downside for front-end CAD rates and the Canadian dollar," says Francesco Pesole, FX Strategist at ING.

A potential trigger for GBP moves would be Wednesday's UK budget announcement, the only event worth speaking of on the UK calendar.

We reported recently that if Chancellor Jeremy Hunt gets the March 06 budget wrong, the Pound could fall by as much as 2%, but analysts say the Pound would find some positives if a credible fiscal easing is announced.

Furthermore, any efforts to boost UK productivity, such as business investment tax breaks, can also result in a stronger Pound.

The big risk for the Pound is if the Chancellor announces big tax cuts deemed unaffordable by bond market players, as was the case with Liz Truss' botched budget of September 2022.

ING estimates a 40 basis point risk premium in 10-year gilt yields, "suggesting markets aren't totally immune to UK fiscal risk".

"Were Chancellor Hunt to misread the mood of gilt investors and cause another upset, sterling would again come under pressure," says Chris Turner, Global Head of Markets at ING. "Short-term models suggest a 2% sell-off in sterling could happen quite easily were investors again to demand a risk premium of sterling asset markets."