GBP/CAD Forecast: Knocking on the Door

• GBP/CAD starts new month softer
• But broader uptrend remains intact
• Thursday could see resistance tested
• Break of 1.6660 opens door higher

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The Pound to Canadian Dollar exchange rate (GBP/CAD) ends January on a dour note but we are told by a prominent Canadian analyst the pair remains well supported ahead of a key central bank decision.

Shaun Osborne at Scotiabank says GBP/CAD remains well supported, even if upside momentum has waned of late.

"GBPCAD continues to consolidate," Osborne says in a technical research briefing released ahead of Thursday's highly anticipated Bank of England interest rate and policy decision.

Above: GBP/CAD technicals. Copyright: Scotiabank, Tradermade Systems Ltd.

The Bank is expected to raise interest rates by a further 50 basis points but Sterling's weak performance in the latter part of January suggests investors are increasingly minded to view this as the last in the hiking cycle.

Investor wariness of another pessimistic economic briefing from the Bank, and the potential for a surprise 25bp rate hike on the day, will likely ensure GBP/CAD remains contained ahead of Thursday.

"The Jan range—a potential bull flag—is playing out amid weakening trend momentum and sterling’s struggle to make progress through key short-term (bull trigger) resistance at 1.6660," says Osborne.

Osborne says only "a clear move above this point would signal another, major leg higher in the GBP was unfolding after the strong rebound from October’s major low."

Expectations for a 'dovish' outcome to Thursday's Bank of England event are consistent with GBP/CAD's recent consolidation, but a more 'hawkish' surprise would potentially propel the pair to new highs over the coming days.

Such a surprise could come in the form of a more robust update to the Bank of England's economic forecasts as well as guidance that further rate hikes will be required to get inflation lower.

Beyond Thursday, Osborne reads GBP/CAD as being relatively well supported with "corrective GBP losses" being "contained to the minimum retracement of the late 2022 rally".

"We continue to anticipate firm support on weakness to the 1.60/1.62 range," he adds.

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This week's Bank of England decision is contextualised by last week's Bank of Canada 25 basis point interest rate hike and guidance that it would now stop raising rates to take stock of current settings.

The Bank of Canada's decision signals the global rate hiking cycle is entering its final phases and other central banks are likely to follow suit.

The Bank of England enters Thursday with a new set of lending data that showed borrowing across the economy has fallen sharply, suggesting previous interest rate rises are having a material impact on UK economic activity.

House purchase mortgage approvals fell to 35.6K in December, from 46.2K in November, putting it on a par with the financial crisis lows of 2009.

The net flow of consumer credit was £0.5BN in December, down from £1.5BN in November, and lower than the previous 6-month average of £1.2BN.

The net flow of sterling money decreased to -£34.7BN in December, from -24.0BN in November.

"December’s money and credit figures revealed that higher interest rates further dampened economic activity at the end of last year. Moreover, the drag on activity will continue to intensify this year as the Bank of England raises interest rates," says Ashley Webb, UK Economist at Capital Economics.

"These numbers are pretty consistent. We have a weaker mortgage market and money supply growth and maybe people unwilling to pay a higher interest rate for unsecured credit. To my mind that again points to the Bank of England raising interest rates by 0.25% this week rather than the 0.5% many still seem to expect," says Shaun Richards, an independent economist who advises pension and investment funds.

A surprise 25bp hike could potentially result in a weaker Pound over the coming days and weeks, say analysts at CIBC who are expecting such a move.

"The reason for our non-consensus call is that after a VERY aggressive year of tightening, the BoE is likely to place greater weight on the impact of prior hikes," says Bipan Rai, Head of FX Strategy at CIBC Capital Markets.

"If we're correct, then watch for the GBP to fall," he adds.