Image © Adobe Stock
The pound to Canadian dollar exchange rate (GBP/CAD) trades in the red on Monday, but the setup remains favourable for gains to be realised in the coming days.
The North American currencies started the week on a solid footing with investors seeking out non-European currencies following the resignation of France's 27-day-old Prime Minister, leaving the country needing a fourth PM in just 10 months or fresh elections.
The mess means the country will struggle to consolidate its increasingly unsustainable debt trajectory and the safe-haven dollar finds favour as a result.
2025 has seen a decent correlation build between GBP/USD and GBP/CAD, with investors apparently treating the two North American currencies as a bloc; what's good for USD proves good for CAD in this instance.
Then there's Japan, where a new Prime Minister has been elected; Sanae Takaichi's win in the LDP leadership election was unexpected and thrusts a proponent of 'Abenomics' into the hot seat.
What does that mean for financial markets? Simply put, she wants more borrowing to spend in order to boost the economy. In a world awash in debt, Japanese and French politics have just thrown up some unsavoury developments.
This leaves currencies that belong to countries with better debt dynamics realising some gains, including the commodity dollars of AUD, NZD and CAD.
Therefore, this week we will be watching how far the USD bid can go, if it can run a little further, then GBP/CAD will stay pressured against and a decline to the 21-day exponential moving average at 1.87050 becomes possible in the first half of the week.
Note that this is also where a graphical horizontal layer of support is located, so it could be one that the sellers have locked onto.
However, any USD failure will also allow GBP/CAD to recover and bring the 2025 high at 1.8841 back into contention.
The dollar might not be in the hot seat at the start of the week but U.S. politics will stay in the frame as politicians try to pass a spending bill through the Senate in order to get the partially shut government up and running again.
The rule of thumb amongst economists is that the dollar will be fine if the shutdown lasts a few days, but problems will build if a resolution is not found and the shutdown extends into the multi-week bracket.
Here, the economy risks slowing and job losses mount, inviting the Federal Reserve to cut interest rates as a precaution. This will help stock markets, but the dollar would likely struggle.
And as we said earlier: what's good for GBP/USD is good for GBP/CAD and makes the case for fresh post-Brexit highs.