The Bank of Canada, Ottawa. Image reproduced under CC licensing conditions

The Pound to Canadian Dollar exchange rate retains a constructive setup that could see further upside over the coming days, although the Bank of Canada's midweek policy decision risks dealing the pair a setback.

GBP/CAD recorded its first down week of 2024 last week following broad-based CAD strength that was linked to a fresh rally in U.S. equity markets, according to analysts.

"Firmer risk appetite — that record close for the S&P 500 — is helping lift the CAD," says Shaun Osborne, FX Strategist at Scotiabank.

"The CAD’s generally positive correlation with risk appetite (as defined by the S&P 500) is strengthening again, with the CAD’s correlation (measured on daily percent returns) with equities rising to 72%. This is the strongest relationship among the majors now," he adds.

On this basis, another strong week for global equity markets appears consistent with further GBP/CAD weakness.

The technical setup is broadly positive and suggestive of further gains over a multi-week timeframe as GBP/CAD sits comfortably above the 200-day moving average. That said, short-term readings hint last week's pullback can extend over the coming days.

We eye a support target at 1.7018, which is the 50% Fibonacci retracement line of the November-December retreat. Resistance is at 1.7168, which forms the 78.6% retracement line.

Above: GBP/CAD at daily intervals. Track GBP and NZD with your own custom rate alerts. Set Up Here.

The highlight of the coming week is the Bank of Canada decision due at 14:45 GMT on Wednesday.

The market sees no chance of a change in interest rates, and the tone and nature of guidance as to the likelihood of future rate cuts will be of importance for markets.

"The BoC is unlikely to signal a meaningful change in policy stance nor provide a clear path toward rate cuts at the January meeting, allowing near-term BoC expectations to continue to reprice higher," says Zoe Strauss, an economist at Morgan Stanley.

Strauss explains that incoming data suggest that BoC is unlikely to change its current communication on balancing the risks of over- and under-tightening.

Morgan Stanley economists expect that the BoC will keep its policy rate unchanged until this summer.

Currency strategists at Morgan Stanley meanwhile think an increase in near-term BoC rate expectations would, on the margin, be CAD-positive.

"Given the strength in December core CPI, we think it is unlikely that the BoC will change its messaging on rate cuts, i.e., remaining dependent on a sustained declining trend in core inflation. We expect near-term rate BoC expectations to reprice higher, which should support CAD," says a note from the bank's FX strategy team.

The Bank of Canada will strike a 'hawkish' tone at next week's policy update, according to an analysis from the Royal Bank of Canada (RBC).

Economists at RBC say although the Bank of Canada (BoC) slipped into a 'neutral' phase in December, it would not be downshifting to outright 'dovish' this January.

"Based on the recent data, particularly still elevated wage and inflation expectations... it is highly unlikely that the BoC shifts into the dovish spectrum," says Jason Daw, Economist at RBC's Dominion Securities division.

"Compared to the December meeting, there are more reasons to keep the phrase 'prepared to raise the policy rate further if needed' and err on the more hawkish side," he adds.

Should the 'hawkish' tilt come as a surprise to the market, the Canadian Dollar could find itself supported.