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The Pound to Canadian Dollar (GBP/CAD) exchange rate could this week make another crack at the ceiling that has prevented it from striking fresh multi-year highs. However, it could be too soon to set fresh highs.
Whereas Pound Sterling has breached multi-year highs against the other G10 commodity currencies (NZD and AUD), such a trophy has eluded efforts against the Loonie.
A look at the chart describes the picture best. Here, we can see three peaks, but all rallies to 1.8152 have ended with a decisive pullback and shift in a short-term direction:
However, last week's pullback is quite interesting as it is shallower than the previous two (one in October, the other in November). This could represent a 'higher low', a basic chart pattern that suggests a more decisive uptrend is brewing.
A more decisive uptrend would see a breach of 1.8152, but importantly, the exchange rate must close above here if we are to see more follow-through.
This week could well see another test of the ceiling that lies between 1.8115, with GBP/CAD breaking back above the nine-day exponential moving average (EMA) on Monday, betraying the Pound's bullish intentions.
But beware, there are numerous pitfalls that could trip the run of the bulls in the next four days.
GBP faces a busy UK calendar this week, and GBP/CAD could approach last week's peaks if Tuesday's UK labour market statistics reveal an ongoing stubbornness in UK wages, which would be consistent with the Bank of England keeping interest rates unchanged at Thursday's policy meeting.
Also on Tuesday is Canada's CPI inflation report, where an undershoot would prompt further CAD weakness as this would raise market bets that the Bank of Canada will maintain its 'dovish' stance on interest rates for longer.
"Evidence of quiescent price growth likely to help justify last Wednesday’s outsized rate adjustment. The headline consumer price index is seen rising just 0.1% on a month-over-month basis in November - down from October’s 0.4% print - with the Bank of Canada’s preferred core measures softening slightly, emphasising the restrictiveness of current policy settings," says Karl Schamotta, Chief Market Strategist at Corpay.
The Bank of Canada last week delivered a 50 basis-point cut at last week’s decision but modified its statement language to say that it would approach future meetings "one decision at a time", suggesting it is nearing a pause.
That "one decision at a time" stance will be challenged by weak data.
"A softer-than-anticipated print could add to downward pressure on CAD, but we think losses should be fairly minimal," says Schamotta.
Indeed, with much pessimism over the economy already priced into Canadian rate expectations and the currency and the Bank of Canada being fast out of the blocks to cut rates, there is the chance of a strong snapback if these inflation numbers exceed expectations.
Wednesday brings the main data test for the Pound, with UK inflation numbers due to be released in the London morning. UK inflation is expected to tick up as it journeys back to the 3.0% level, putting it further out of reach of the Bank of England's 2.0% target and limiting the scope for the Bank to cut rates.
The Bank of England will make its latest interest rate decision on Thursday and rates are expected to remain unchanged.
The vote composition for the decision will potentially move GBP/CAD, with the risk being that more than one policy setter votes for a cut, which implies they are keen to get on with the job.
Yet, it is clear their hands are tied given the drift higher in inflation, and any weakness in GBP/CAD stemming from the Bank of England will be limited.
Indeed, the headline is that the Bank will likely cut only four times in 2025, which can ensure that the Pound retains much of its support from the UK's elevated interest rates.
Although short-term momentum is firmly behind GBP/CAD, we suspect a break to new multi-year highs will be a story for early next year.
An original version of this article can be viewed at Pound Sterling Live