- GBP/CAD falls through 1.70 to test 1.69

- Follows noxious mixture of GBP & USD losses

- Further losses possible absent GBP/USD recovery

Image © Bank of Canada

GBP/CAD spot rate at time of writing: 1.6928Bank transfer rate (indicative guide): 1.6336-1.6454FX specialist providers (indicative guide): 1.6810More information on FX specialist rates, hereSet an exchange rate alert, hereThe Pound-to-Canadian Dollar exchange rate fell to its lowest level since December 2020 ahead of the weekend after both the U.S. Dollar and Pound Sterling suffered widespread losses.

Sterling underperformed peers on Thursday in the wake of the Bank of England policy event and was closely followed by the New Zealand and U.S. Dollars, though losses for the latter helped the Canadian Dollar to a fresh multi-year high that served only to accentuate GBP/CAD’s declines.

Simultaneous declines in GBP/USD and USD/CAD saw the Pound-to-Canadian Dollar exchange rate (GBP/CAD) dive bombing the 1.70 handle before dropping like a stone toward 1.69, even as global stock markets and oil prices cratered in price action that bore all of the hallmarks of risk aversion among investors.

GBP/USD’s 0.21% decline paled into insignificance when it stood next to USD/CAD’s 0.69% fall that took it below 1.22 for the first time since May 2015, lifting the Canadian Dollar to a six year high along the way.

USD/CAD's losses therefore accentuated much of the GBP/CAD decline.

“The underlying technical trend in USDCAD remains bearish and deeply-entrenched on the charts; trend oscillators remain aligned negatively for the USD across a range of timeframes and this will severely curb the USD’s ability to stage counter trend corrections,” says Shaun Osborne, chief FX strategist at Scotiabank.

Osborne says USD/CAD could have scope to probe down near the 1.20 level now it’s broken below 1.2250, which would be a bearish outcome for GBP/CAD unless the main Sterling exchange rate GBP/USD is able to recover lost ground ahead of the weekend.

GBP/CAD would fall to 1.6722 in the unlikely event that GBP/USD remained around Thursday’s 1.3880 while USD/CAD plumbed the depths of the 1.20 area.

Above: Pound-to-Canadian Dollar rate shown at hourly intervals with GBP/USD and USD/CAD.

GBP/CAD came under increasing pressure in the wake of Thursday’s Bank of England (BoE) monetary policy decision, which saw the bank announce sweeping upgrades to GDP and inflation forecasts.

However, Governor Andrew Bailey later noted downside risks to those expectations and declined to “validate” market expectations for when and by how much it might be inclined to lift interest rates over the coming years.

“The new forecasts show the unemployment rate falling to 4.5% (the level perhaps consistent with no spare capacity) in Q3 2022 rather than in Q1 2024 and inflation getting back to the 2.0% target by the end of 2022. So at face value, that suggests the conditions for tighter policy may be in place in late 2022, much as the markets currently expect,” says Thomas Pugh at Capital Economics.

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Market expectations of the BoE may have simply been too high and when this Thursday’s decision gave now catalyst for further gains it may have prompted profit-taking that pulled the rug from under Sterling, although it’s also possible that some investors were giving the Pound a wide berth due to local and Scottish elections taking place in the background.

Some voices have suggested that a strong victory this week for the ruling party in Scotland would enhance the prospect of an eventual second referendum on ‘Scottish Independence,’ though that’s not obvious and to the extent that it does another referendum would be a medium-to-long term risk for Sterling if anything.

“For the time being, the MPC's implicit message to FX and interest rate markets is that there is broad alignment between the way policymakers and investors see the outlook evolving,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets, who’d warned that Sterling could suffer losses on Thursday.

Above: Pound-to-Canadian Dollar rate shown at daily intervals with GBP/USD and USD/CAD.