"The BoC last raised its key rate by 25 basis points to 4.5% in January and then became the first of the G-10 central banks to enter an interest rate pause" Commerzbank.

Image © Adobe Stock

The Pound to Canadian Dollar exchange rate held near the middle of a probable short-term range in the final session of the week but next Wednesday's Canadian inflation figures could see it breaking down toward either 1.67 up ahead, or climbing in the direction of 1.72 instead.

Canadian Dollar exchange rates were a mixed bag of performances in Friday trade when falling commodity prices appeared to lean against the Loonie in some parts while Sterling outperformed all major counterparts on the interbank market with the sole exception being the Swedish Krona.

Along with Sweden's Krona and the Norwegian Krone, Sterling and the Canadian Dollar saw some of the broadest gains in early North American trade but were followed closely behind by the U.S. Dollar against a mixed backdrop for prices other kinds of assets.

"The regional bank concerns remain an issue weighing on risk and risk appetite but the headlines around the debt ceiling seem a little more constructive," writes Brad Bechtel, global head of FX at Jefferies, in a Friday markets commentary.

"This morning we had some soft-ish data from the UK as well after the MPC hiked rates by 25bps. The MPC sounded pretty confident on the economy but the market has pushed GBP pretty far over the last several weeks and some profit taking seems intuitive at current levels," he adds.

Above: Pound to Canadian Dollar rate shown at hourly intervals alongside USD/CAD.

Sterling outperformed on Friday despite Office for National Statistics data suggesting the UK economy shrank -0.3% in March, taking some of the shine off what had previously been a robust quarter while setting up a strong handover to the second quarter.

"The economy is performing better than expected, the labour market shows little sign of loosening and (perhaps most importantly) inflation is not falling as quickly as expected," writes Elsa Lignos, global head of FX strategy at RBC Capital Markets, in Thursday market commentary.

"In FX, we have a tactical short GBP/USD position heading into the meeting (entry 1.2604, spot 1.2620, stop 1.2720, target 1.2350)," she adds.

Friday's data came hard on the heels of significant upgrades to Bank of England (BoE) forecasts for the economy over the coming year, and the implied suggestion that Bank Rate could rise further from its newly-increased level of 4.5% to 4.75% in the months ahead.

So far, however, the Pound has struggled for traction against a Canadian Dollar that has held up just as well in the face of a rebounding U.S. Dollar that has been accompanied of late by a rallying Japanese Yen and falling stock markets.

Above: Pound to Canadian Dollar rate shown at 4-hour intervals with Fibonacci retracements of March rally indicating possible areas of technical support for Sterling.

Speculation about the health of some small and medium-sized U.S. banks has helped to pick the greenback up from earlier lows and left GBP/CAD meandering in a largely directionless range, albeit with a slight bias toward the downside.

But much about the price action in the days ahead is likely to be determined by what next Wednesday's inflation say about Bank of Canada (BoC) monetary policy as well as the resulting implications for USD/CAD and other Canadian Dollar pairs.

"GBP/USD still holding above 1.2500 seems slightly better situated than EUR still and is resisting the USD rally a little better than many of theses other currencies. 1.2359 the 50dma seems like a target in the near term but it may grind rather than gap down to those sorts of levels," Jefferies' Bechtel says on Friday.

The BoC assumed in April that USD/CAD would likely trade around1.35 level over much of the current quarter but further meaningful progress in brining inflation back to the 2% target next Wednesday might see the exchange rate pushing higher and vice versa.

Any further disinflation in Canada could see the markets bet on the cash rate being cut in the near future while potentially lifting GBP/CAD in the direction of 1.72 if USD/CAD climbs further, although some analysts see BoC policy driving USD/CAD lower over the coming months.

Above: USD/CAD shown at daily intervals with U.S. Dollar Index.

"The BoC last raised its key rate by 25 basis points to 4.5% in January and then became the first of the G-10 central banks to enter an interest rate pause," says Elisabeth Andreae, an FX analyst at Commerzbank.

"At its last meeting in April, however, it [the BoC] expressed concern about continued stubbornly high core inflation, and a rate hike was discussed. It repeatedly emphasized its readiness for further tightening," she adds.

New forecasts from Commerzbank's Andreae and colleagues tipped USD/CAD to trade around 1.34 this quarter and ahead of an expected fall to 1.30 by year-end with EUR/CAD seen little changed around 1.48 over the same period.

GBP/CAD,meanwhile, tends to closely reflect the relative performance of Sterling and the Loonie when each is measured against the U.S. Dollar and would likely fall as far 1.6689 next week if Jefferies' Bechtel and RBC's Lignos are right in their expectations or strategies for GBP/USD next week.

"We expect the Bank of England to adopt more hawkish rhetoric than the Fed in the coming months, which will support the GBPUSD to rise to the 1.30 area after the correction of the recent rally with a pullback to 1.2350," says Alex Kuptsikevich, a senior market analyst at FxPro.

Above: Pound to Canadian Dollar rate shown at weekly intervals with Fibonacci retracements of 2021 downtrend indicating possible areas of technical resistance for Sterling while selected moving averages denote possible support. Click image for closer inspection.