Canadian Dollar Week Ahead Forecast: Bank of Canada Decides, GBPCAD Uptrend Still Intact

• GBPCAD upward channel still intact
• USDCAD tipped lower by Commonwealth Bank
• All eyes on Bank of Canada midweek

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The Canadian Dollar could find some support from this week's Bank of Canada decision; however, any such strength would likely be limited in time and nature say a number of analysts we follow.

The Canadian Dollar has been an underperformer in the G10 space over the past month, tracking the U.S. dollar closely, making for some relatively weak technical signals on the major charts.

To be sure, the Canadian Dollar jumped by 0.78% against the Pound Thursday last week, causing the Pound to Canadian Dollar exchange rate to drop back and challenge the validity of its rising channel on the charts:

Above: GBPCAD at daily intervals showing Fibonacci retracement levels and the uptrending channel. Track CAD with your own custom rate alerts. Set Up Here

However, as the above shows, the rising channel remains intact for now, with near-term price action also finding support from the 78.6% Fibonacci level that is formed from the retracement of the August-October decline.

The price charts suggest GBPCAD can recover from the recent decline and ultimately press ahead to test the multi-month high at 1.7323, where we expect significant resistance to develop.

Should this level break, then Pound Sterling could break into levels not seen against the Canadian Dollar since 2021.

Regarding the Dollar to Canadian Dollar exchange rate (USDCAD), Kristina Clifton, an analyst at Commonwealth Bank, says, "USD/CAD can ease further alongside the USD this week."

The Bank of Canada is widely expected to keep the overnight policy rate unchanged on Wednesday, with Clifton saying it has made significant progress in getting inflation back down to target.

"The economy has also shown clear signs of weakening. The risk is the BoC tones down or even removes its tightening bias, pushing USD/CAD up on the day," says Clifton.

Francesco Pesole, FX Strategist at ING, says markets are pricing in 100bp of cuts in 2024 in Canada, so it is likely that expectations are leaning towards a softening of the hawkish tone by the BoC at this meeting.

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"Ultimately, data – and the spill-over from Fed pricing – remain significantly more important for the CAD swap curve. CAD may rise on a hawkish hold," he says.

But ING's currency strategists don't expect the foreign exchange market impact of the BoC to be very long-lasting.

"We don’t see the loonie as a particularly attractive currency into the first months of next year, given its very high correlation to U.S. data," says Pesole.

ING looks for U.S. data to deteriorate in 1H24, leading to further Canadian Dollar weakness; we believe this could potentially propel GBPCAD to its highest levels since 2021.