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Pressure on the British pound against the Canadian dollar is easing, though a hawkish Bank of Canada could keep the rebound brief.
The Pound to Canadian Dollar exchange rate starts the week at 1.8753 after recovering from a low of 1.8608 on Thursday, and Pound Sterling Live looks for the rebound to extend towards 1.88 in the coming days, where gains could stall.
The Canadian dollar's setback since Thursday looks to be a "sell the fact" reaction to last week's Bank of Canada rate hike, but the Bank's message was hawkish, and that narrative can underpin the Loonie and keep GBP/CAD's rebound brief.
Thursday's Bank of England decision and Friday's Canadian jobs report are the week's main events for the pair.
From a technical perspective the setup is consistent with further GBP/CAD recovery patterns: the 100-day moving average, the blue line on the chart, is drawing GBP/CAD higher and has converged with graphical horizontal resistance at 1.8810, the red line.
GBP/CAD daily chart. Image © Pound Sterling Live, chart created with TradingView.
The 1.8810 line has acted as a fulcrum for the pair since the summer: it capped rallies through August and September, served as support through much of October and gave way on 22 October, turning back into resistance.
With the 100-day average sitting just beneath the line, the band between them could limit gains this week, and GBP/CAD would need to clear it on a closing basis to open the door to a retest of 1.89 over the coming weeks.
Support sits at 1.8650, the purple line, where the September and October declines were turned back, and Thursday's dip to 1.8608 was rejected within the same session.
Pound Sterling Live looks for GBP/CAD to recover towards 1.8810 this week, with gains likely to stall at the line. A daily close above 1.8810 would open the way to 1.89 over the coming weeks, while a daily close beneath 1.8650 would change the near-term Pound to Canadian Dollar forecast.
Further out, GBP/CAD has traded between 1.8650 and the 1.89 area since August, with 1.8810 at the centre of that range, and the side of the line on which the pair settles is likely to set its direction into December. A break beneath 1.8650 would bring graphical support at 1.8350, the grey line, into view.
Two weeks ago Pound Sterling Live's Week Ahead Forecast called for GBP/CAD to fade, with a close beneath the 1.8810 band the signal and 1.8711 the next stop. The pair broke beneath 1.8810 on 22 October and extended its decline to 1.8608 after the Bank of Canada's decision.
The Loonie Needs the Bank of Canada's Hawkish Message to Hold
The Bank of Canada raised its policy rate to 2.50% from 2.25% on 28 October, its first increase since July 2023, and now expects inflation around 3.4% by the end of this year, as Pound Sterling Live reported.
The Canadian dollar rallied on the decision but has since given back some of those gains, a move Pound Sterling Live reads as a "sell the fact" reaction rather than a turn in the Loonie's fortunes.
What does "sell the fact" denote? Traders who buy a currency ahead of an expected event often take profits once it happens, so the currency can fall even when the outcome matches expectations. The selling tends to fade once those positions are cleared, leaving the underlying story to reassert itself.
Canadian inflation: Headline CPI has risen above 3% on fuel prices, while core measures are below 2%.
The underlying story for the Loonie is a hawkish one, "going into the decision, some were speculating the Bank would deliver a 'dovish hike' but it was far from that in our view," say Taylor Schleich and Ethan Currie, economists at National Bank of Canada, who lean towards a second hike on 9 December.
Governor Tiff Macklem kept that door open: "There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully."
The Bank of Canada also delivered the move it had prepared markets for, with CIBC economists judging ahead of the meeting that the Governor's remarks "were designed to have markets pricing in that outcome." The Bank's standing with markets is therefore intact, in contrast to the Reserve Bank of New Zealand, which held rates last week against pricing for a near-certain hike and, in Pound Sterling Live's view, now risks losing credibility with investors. That divergence explains why the kiwi remains under pressure while the Loonie's setback looks shallow.
Corpay expects the Loonie to weaken before year-end on the view that markets have priced too much tightening, "we remain convinced that markets are overpricing the Bank's tightening trajectory, and expect a bout of weakness before the end of the year as implied rate differentials widen against the currency again," says Karl Schamotta, Chief Market Strategist at Corpay.
Canada's Jobs Report Must Keep a December Hike in Play
Canada's October labour force survey lands at 13:30 London time on Friday, with consensus looking for 18,000 new jobs and an unemployment rate of 6.5%, according to Barclays. Under the playbook, a print above consensus would strengthen the case for a December hike and support the Canadian dollar, pushing GBP/CAD lower, while a miss would weigh on the Loonie.
Commerzbank describes Canada's recovery as fragile given a weak labour market, one the Bank of Canada appears willing to tolerate, so a soft report would test how firmly the Bank is committed to a second hike.
The federal budget on Thursday is second tier for the currency, with CIBC forecasting a deficit of C$72.0bn against consensus of C$70.2bn and limited market implications from the accompanying rise in bond issuance.
The Bank of England Must Signal More Hikes to Lift the Pound
Consensus looks for the Bank of England to lift Bank Rate by a quarter point to 4.00% at 12:00 on Thursday, leaving UK rates 150 basis points above Canada's. Under the playbook, a signal that more increases lie ahead would support the pound, while guidance framing the move as a single step would weigh on it.
Lloyds sees the move as an insurance hike and doubts the Bank will deliver the four increases markets price over the next 12 months, while Barclays warns of the risk of a "dovish hike," which "coupled with increasingly extended hedge fund positioning, could trigger some technical damage."
A cautious Bank of England would leave GBP/CAD struggling beneath 1.8810, while a hawkish one would give the pound the push it needs to test the line.
With the Bank of Canada's hawkish message intact and the 1.8810 line overhead, Pound Sterling Live's Pound to Canadian Dollar forecast looks for the pressure on GBP/CAD to keep easing towards 1.8810 this week, with gains likely to prove brief unless the Bank of England signals more hikes to come.
