I'm recommending a new short position on the GBP/CAD currency pair as we approach the upcoming Bank of England (BoE) policy meeting scheduled for next week. At the moment, the pair is trading slightly above a key support level represented by the 200-day moving average, situated around 1.66 key level as well. If this support level is breached, it could potentially lead to a further decline in the exchange rate, possibly revisiting the lows witnessed earlier this year near the 1.6000 level.

I've chosen to take this short position based on my recent shift towards a more pessimistic short-term outlook for the British Pound (GBP). This shift in perspective has been influenced by the less hawkish statements made by BoE officials, which have tempered expectations for additional interest rate hikes beyond the upcoming Monetary Policy Committee (MPC) meeting. This shift aligns with my own projections, which anticipate only one more rate hike from the BoE, ultimately resulting in a peak policy rate of 5.50%.

Furthermore, recent economic activity data suggests that growth in the third quarter may turn out to be considerably weaker than initially anticipated. Initially, the BoE had forecasted growth of 0.4%, but following a weak start in July (-0.5%), it now seems unlikely. If the BoE follows the path of the European Central Bank (ECB) and signals increased confidence that interest rates are nearing their peak, this could trigger a similar sell-off for the GBP during this week and the upcoming week.

On the other side of this trade, the Canadian Dollar (CAD) has not fully benefited from the recent rebound in energy prices over the past few months. My short-valuation model indicates that the CAD is undervalued, and there is room for the CAD to strengthen and catch up. Oil prices have already surged by approximately 30% since their June lows, approaching the USD100 per barrel mark. This increase is supported by a tightening demand and supply balance, which is expected to worsen in the fourth quarter.

SHORT ON GBPCAD AS CAD GAINS STRENGTH

Sep 21 2023

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