GBP/CAD trades 1.6832-1.7079 range into BoC decisionScope for break higher on any CAD weakness post-BoC US inflation figures also posing upside risk for GBP/CAD

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The Pound to Canadian Dollar exchange rate entered the new week near some of its best levels for more than a year but could soon get an opportunity to reach new highs if it's correct to interpret Wednesday's Bank of Canada (BoC) interest rate decision as something of an asymmetric downside risk for the Loonie.

Canadian Dollar gains and Sterling losses pushed GBP/CAD lower from one of its best levels since February 2022 on Monday after an earlier rally by the Pound was roadblocked by a major level of technical resistance sitting up around 1.7068 on Friday.

GBP/CAD stalled at the latter level when Statistics Canada reported a rebound in employment for June but also a moderation of pay growth, which might help to assuage some of the BoC's concerns about the outlook for local inflation ahead of this Wednesday's interest rate decision.

"They surprised hawkish last meeting and the pricing is now 67% hike vs. 33% no change," says Brent Donnelly, CEO at Spectra Markets and a veteran currency trader with a career spent between hedge funds and global banks like HSBC and Nomura.

"My guess is that the outcome will sound dovish, whether or not the Bank hikes. They should sound non-committal going forward because there is a long gap until the next BoC meeting (September 6 th)," Donnelly writes in Monday's am/FX daily macro newsletter.

Above: Pound to Canadian Dollar rate shown at daily intervals with selected moving averages indicating possible areas of technical support for Sterling. Click for closer inspection.

Implied market expectations suggest investors are banking heavily on the BoC raising its cash rate from 4.75% to 5% on Wednesday, meaning the Canadian Dollar might be susceptible to losses if the Governing Council elects to leave the policy rate unchanged.

There are reasons why it might too including most of the economic figures released in Canada over the recent weeks, though most importantly of all; recent inflation figures have shown the BoC making some of the most significant progress toward its target among advanced economy central banks.

"We have previously written that we are tactically biased to the downside and selling rallies in USD/CAD, but we are starting to question this bias and prefer to take a neutral stance," says Adam Cole, chief FX strategist at RBC Capital Markets.

"Although our CA rate strategists assign an 80% probability of a 25bp hike from the BoC on Wednesday, the market is already pricing a ~75% probability as of writing, and it is more likely that the market will take its cues from Wednesday’s US CPI report," he adds.

All bar one of Canada's main inflation rates fell further than had been expected by economists when data for May was released last month while Statistics Canada's more recent report of an April slowdown has left the overall economy growing broadly in line with Bank of Canada forecasts.

While the BoC might yet decide to raise rates again on Wednesday, recent economic data has stopped short of making an argument for it to do so and when combined with the current balance of market expectations for the decision, provides two reasons for why the Loonie be unlikely to benefit much even if the BoC does raise its rates.

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

This is partly because if the BoC does raise rates, this combined with the recent weakness in local data could lead the markets to worry about 'overtightening' monetary policy heaping up even more woe for the economy further down the line.

"We do expect that July’s hike will be the last of the cycle as the economy more clearly weakens over coming months," says Taylor Schleich, a director of economics and strategy at National Bank of Canada Financial Markets.

"To us, there’s already nascent signs of that in labour markets where, despite strong headline jobs growth, labour demand hasn’t been able to keep pace with surging labour supply (i.e., immigration) and the unemployment rate is quickly rising," he adds in a Monday research briefing.

Wednesday's BoC decision is the highlight of the week for the Canadian Dollar and could be likely to see GBP/CAD further test or perhaps even break above the big resistance level at 1.7068 over the coming days.

Inflation figures out across the southern border on Wednesday might also encourage this outcome if they also lead to a stronger U.S. Dollar, although all of this assumes GBP/CAD isn't sunk by Sterling or any economic figures coming out of the UK beforehand.