Pound-Canadian Dollar: Scope for More Weakness This Week

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The pound-Canadian dollar exchange could stay under pressure in the coming days as a spell of Canadian dollar outperformance threatens to extend.

The Loonie was one of the best-performing G10 currencies last week, and further outperformance is signalled by broad gains witnessed on Monday.

Canada's currency advances against the majority of its peers and records a 0.25% gain against the British pound at the time of writing.

GBP/CAD is under pressure at 1.8448, which puts it on course for the previous week's lows at 1.8421, which has established itself as a near-term support zone.

Below here, a move to medium-term range support at 1.8350 becomes a possibility.

The Bank of England is in focus this week, with Thursday's interest rate decision likely to drive the GBP leg of the GBP/CAD equation.

The Monetary Policy Committee is expected to leave interest rates unchanged but push back against market expectations for at least two hikes before the end of the year.

Should it do so, the British pound could come under pressure. Analysts at HSBC say the British pound has shown resilience of late due to a hawkish tilt at the Bank of England's 19 March meeting. The Bank voted unanimously to keep interest rates on hold, judging that the war in the Middle East could cause a spike in inflation.

"With the topic of potential de-escalation arriving in FX markets, this rate buffer that GBP has built up may be eroded," says HSBC, looking forward to a potential end of the conflict in the Middle East.

"Financial markets are once again pricing upwards of two Bank of England rate hikes this year. Governor Andrew Bailey won't like that," says James Smith, Developed Markets Economist at ING Bank.

Bailey and the MPC are expected to confirm they still want to see how the data evolves, but equivocate that the next move could as easily be cut as a hike, owing to underlying weakness in the domestic economy.

The Canadian dollar has meanwhile been one of the better-performing G10 currencies during the war as rising oil prices have bolstered the country's export earnings from its extensive oil-producing assets.

"The Canadian economy is well insulated from the conflict in the Middle East and activity has continued to surprise positively in recent months. This resilience is rooted by the CAD’s sensitivity to oil prices, which could see it outperform in a re-escalation scenario," says HSBC.

HSBC strategists currently hold a "sell" recommendation on GBP/CAD.