"We’d also point to the fact that several other DM central banks are now at, or close to, sufficiently restrictive levels and set to pause as well (including the RBA, BoE, and the Fed potentially)" - CIBC Capital Markets.

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The Pound to Canadian Dollar exchange rate receded further from one-year highs following this week's Bank of Canada (BoC) Monetary Policy Report while the relative interest rate outlook suggests the tide is potentially beginning to turn in favour of sellers in GBP/CAD. 

Canada's economy performed better than was expected by the BoC early in the new year while recent data has suggested that inflation will take longer to return to its target than previously forecast, keeping alive the risk or prospect of further increases in the cash rate.

That was the Bank of Canada's message on Wednesday and is one set of the reasons why the Pound to Canadian Dollar tide might now be favouring sellers.

"The slower trajectory there is due to inflation expectations coming down slowly, sticky service price inflation and elevated wage growth," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets, in a Wednesday reference to the BoC's latest inflation forecasts. 

"Nothing today changes our outlook for the BoC, or the CAD. For the former, we still have the Bank on hold for the rest of this year," he adds.

Above: GBP/CAD shown at daily intervals with selected moving averages denoting possible areas of technical support for Sterling and Fibonacci retracements of 2022 downtrend indicating possible areas of technical resistance. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Rai and the CIBC team have advocated since late March that clients of the bank sell USD/CAD and GBP/CAD in anticipation of declines toward 1.30 and 1.61 respectively over the coming weeks or months, from more than 1.67 and around 1.35 currently.

There are multiple reasons forming the rationale for these trades including the outlook for Bank of Canada interest rate policy relative to other central banks, which has been supportive of the Canadian Dollar in recent years and is expected to remain so in the weeks and months ahead.

"We’ll concede that this is a short-term theme that will keep the CAD under pressure on select crosses. But we’d also point to the fact that several other DM central banks are now at, or close to, sufficiently restrictive levels and set to pause as well (including the RBA, BoE, and the Fed potentially)," Rai says. 

"We remain bearish USD/CAD. Primarily, this is because net positions are skewed too far bearish amongst non-commercial market participants (including asset managers and hedge funds)," he adds. 

Above: Market-implied expectations for central bank interest rates by year-end. Source: Goldman Sachs Marquee. 

CIBC's March sales in USD/CAD and GBP/CAD were in the money by early April and would be more profitable still if the resilience of the Canadian economy leads financial markets to doubt their continuing wagers on the cash rate being cut before year-end. 

"We maintain our baseline forecast that the BoC does not hike again in 2023 because improving inflation and the Governing Council’s “reinforced confidence” that inflation will continue to decline should keep the BoC on hold," says Joseph Briggs, an economist at Goldman Sachs.

"However, we continue to see hawkish risks on net given the BoC’s stated preparedness to hike further, its asymmetric concern for upside risks to inflation, and Governor Macklem’s press conference statement that the rate cuts priced by markets later this year “do not look like the most likely scenario” to the Governing Council," he adds in Wednesday remarks.

Sales of GBP/CAD could become even more profitable if UK inflation shows signs of converging with Bank of England (BoE) forecasts next week and in the months ahead, given that financial markets are also betting that Bank Rate is likely to be raised further this year.

Above: GBP/CAD at weekly intervals with selected moving averages denoting possible areas of technical support for Sterling and Fibonacci retracements of 2022 downtrend indicating possible areas of technical resistance. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

"According to BEIS data, the price of petrol at the pumps rose 8.6% between February and March of last year but fell 0.8% over the same period in 2023. This should have contributed to CPI inflation falling to a forecast 9.8% in March," says Andrew Goodwin, chief UK economist at Oxford Economics.

The latest BoE forecasts indicate that inflation is likely to fall sharply from 10.4% in February to around 4% by year-end before then sliding below the 2% target toward the end of 2024, and even if Bank Rate remains unchanged at its recently-increased 4.25% level in the interim.

This could mean the BoE will be reluctant to raise interest rates further in May and the subsequent months, posing risks to the Pound along the way and at a point when the technical picture on the charts is beginning to suggest that GBP/CAD may have topped out following a six-month rally.

"The broader uptrend in the GBP remains intact and trend oscillators are aligned positively for the pound but even so, the narrowing of the daily range between rising support in the mid-1.65s and noted resistance does suggest some vulnerability," says Shaun Osborne, chief FX strategist at Scotiabank.

"The next 3 big figures or so of directional movement in the cross will very likely be driven by which side of the range breaks down from here," he adds in a Tuesday review of the Canadian Dollar charts.