Canadian Dollar in Focus: Impact on GBP/CAD Should the Bank of Canada Raise Interest Rates

The Canadian Dollar's dominance will be tested mid-week when the Bank of Canada meet to decide on whether or not to raise interest rates. Meanwhile, technical studies confirm further gains against the British Pound are likely.

The Pound to Canadian Dollar exchange rate (GBP/CAD) has fallen from the 1.7800 highs set in May to its current 1.6547 level. 

The lion's share of the move has been driven by increased expectations that the Bank of Canada (BOC) might start to tighten monetary policy.

There are expectations that today's decision will see an interest rate rise to the tune of 0.25% taking the Bank's rate to 0.75%.

&0% of economists in Bloomberg’s survey expect a hike and the forward curve is fully priced for a move and close to pricing another hike by year-end.

If a hike is not delivered the Canadian Dollar will fall sharply in a corrective move.

Today will also bring an updated MPR and press conference from Governor Poloz and Senior Deputy Governor Wilkins.

"Our economists forecast a further hike in October that would erase the 2015 cuts in aid of the oil price adjustment by the end of this year. Framing the cuts as “insurance removal” alleviates some pressure the Bank may face in light of weak, current inflation readings," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.

The main focus in the MPR will be the timing of closure of the output gap, which is currently forecast for “the first half of 2018”.

"Shortening this timeframe to something closer to the turn of the year would be consistent with the second rate hike we anticipate and there should be some small upside for CAD remaining if that is the case," says Cole.

We believe much of the hike has been priced into CAD, so don't be surprised if it falls back in a 'buy the rumour, sell the fact' kind of move.

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Technical Outlook: GBP/CAD Decline Likely to Extend

The chart for the pair is sending mixed messages.

On the one hand, it is showing the pair is in a short-term downtrend since the 1.78 May highs rolled over, and this trend is expected to extend.

Yet on the other hand this very same downtrend is looking like it may be overstretched and at risk of reversing and moving higher.

The MACD is converging with price – MACD is rising whilst price is falling – and this is a sign of a potential reversal, but on its own is not enough.

The downtrend has formed a measured move, zigzag or abc pattern on its way down from the May highs, and this pattern now looks complete; and normally once finished they lead to a reversal of the short-term trend.

Price action itself is still bearish, however, so we must assume the downtrend will extend from here.

This also dovetails with the consensus market expectation that the BOC will raise interest rates at the meeting on July 12.

There us some strong resistance at the 61.8% (0.618) Fibonacci retracement at 1.6497, which is 61.8% of the previous rally from the May highs (see weekly chart below), and considered to have significant characteristics by technical analysts.

If the pair can break below this level, confirmed by a move below 1.6450, however, it would probably lead to a continuation down to a target at 1.6350.