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The pound to Canadian dollar exchange rate (GBP/CAD) is under pressure ahead of midweek central bank decisions.
Both the Bank of Canada and U.S. Federal Reserve deliver decisions that will have a powerful pull on GBP/CAD, depending on how 'dovish' the two central banks sound.
A cut from both would be a recognition of soft employment trends in the U.S. and Canadian economies, and that there's a sense that inflation is well contained.
Here, GBP/CAD would recover recent losses.
That being said, there appears a degree of uncertainty as to whether the BoC will cut on Wednesday, which should encourage a lively currency reaction to the actual outcome.
Strategists at Bank of America are positioning for CAD outperformance as the BoC holds interest rates.
Bank of America says sticky inflation, with both core measures above 3%, leaves policymakers little room to ease this month. "Risk/reward favours positioning for lower USD/CAD," say strategists.
However, ING takes the other side of that trade, saying the "Canadian dollar looks vulnerable" heading into the midweek event.
The argument is that the BoC will not only cut interest rates but also make clear the door stays open to further cuts.
"The door may be left open to more easing, and CAD should remain vulnerable against most of the G10," says Francesco Pesole, FX Strategist at ING Bank.
The need to lower rates further rests on lingering trade-induced uncertainty, which continues to weigh on Canadian activity and carries risks of broader jobs market deterioration.
Should the Bank cut rates and keep the door open to further easing, the market will adjust accordingly, leaving CAD "vulnerable in the crosses," says Pesole. "Crosses" refers to non-USD Canadian dollar exchange rates, for example, the pound into Canadian dollar conversion.
Therefore, GBP/CAD could find the BoC event stokes a recovery.
That being said, the GBP/CAD is highly sensitive to GBP/USD, and any USD strength this week will surely weigh on GBP/CAD.
In fact, it could be argued that the bigger USD is proving more of an influence on GBP/CAD than domestic Canadian developments.
For its part, the chart is heavy and advocates further near-term weakness:
The pair has broken below its nine-day exponential moving average, and while below here we look for further weakness.
Ahead of the BoC and the Federal Reserve's decision - also on Wednesday - GBP/CAD can go as low as 1.8550.
However, given the two-way risks presented by the midweek central bank events, we would anticipate that weakness is restricted to this level.
A 'hawkish' Fed and BoC would combine to drive GBP/CAD below here.
However, a 'dovish' guidance from both central banks would spark a GBP/CAD recovery to 1.8698 and then 1.88.