GBP/CAD uptrend hits a barrierPullback likely near-termBank of England is the week's key event

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The Pound to Canadian Dollar exchange rate's 2024 rally appears to have hit the high water market for now, and a deeper pullback is possible if Thursday's Bank of England update lands dovish.

The daily charts show upside momentum in GBP/CAD has waned noticeably, with the stiff resistance in the 1.72-1.73 area offering significant incentive for tactical selling by real money and speculative market participants.

We note too that the resistance facing GBP/CAD is also present in the GBP/AUD and GBP/NZD exchange rate pairs; so we need to see another leg of depreciation in the commodity currencies to boost the Pound to new multi-month highs.

GBP/CAD is still in a medium-term uptrend as it trades above the 200-day moving average (blue line in the chart), and our rule states that any consolidation must resolve to the upside unless it dips.

But we suspect momentum is waning here and look for a retreat back to the 200 DMA at 1.6923 in the coming days.

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

GBP/CAD is peculiar in that it is proving a solid proxy for the headline Pound-Dollar exchange rate: therefore, it could well be that only when the U.S. Dollar weakens will GBP/CAD break above the 2023 highs.

This stems from the synchronisation in North American interest rate policy: expect the Bank of Canada to start cutting interest rates alongside the Fed.

With a March rate hike at the Fed possible, it might not be too long before the CAD is hamstrung by a Bank of Canada rate cut.

We suspect only when this happens will the Pound-Canadian Dollar exchange rate push above the 2023 high at 1.7338.

In Canada, keep an eye on the release of GDP data for November on Wednesday at 13:30. A reading of 0.1% month-on-month is anticipated, underscoring the economy's current lacklustre performance.

But this is backwards-looking data and unlikely to move CAD much.

Instead, the Bank of England forms the highlight of the week for GBP/CAD, Markets see over 100 basis points of rate cuts coming from the Bank in 2024, and the Pound can advance towards the top of the range should these bets lessen.

Such an outcome would require some members of the Bank's Monetary Policy Committee to vote for further rate hikes, although any votes for rate cuts could see markets boost rate cut bets.

Deep cuts to the Bank's inflation forecasts could also weigh on the Pound as this would be an admission that the backdrop is increasingly consistent with rate cuts.

The tone of Bank of England Governor Andrew Bailey's press conference will also be important as it could easily undermine the messages conveyed by the official statement and forecasts.

One only needs to recall that it was an apparent lack of pushback against markets by the ECB's Christine Lagarde last Thursday that saw investors raise bets for an April rate cut, which resulted in a Euro sell-off.

"The reality is that defending a 'higher for longer' stance on interest rates is getting harder to defend as the inflation backdrop shows signs of improving," says James Knightley, Chief International Economist at ING.

ING expects the Bank will drop the suggestion that it could raise rates further but keep the signal that rates need to stay restrictive for an extended period.

If the Bank can stick to this message, the recent rally in the Pound can extend and maintain the Pound-Canadian Dollar uptrend, but to reiterate, it will probably require a major bout of USD weakness to really turbocharge any rally.