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Our Week Ahead Forecast sees a more constructive setup emerging for the pound to Canadian dollar exchange rate (GBP/CAD) if a major resistance line can be overcome.
November has seen GBP/CAD try to build a base following the drop suffered during October, and from this base, a rally is starting to sprout.
The chart shows 1.8325 provides the floor to the monthly range and 1.8547 the ceiling. However, the setup is a little more nuanced, with a truer source of chart resistance being supplied by the descending 21-day exponential moving average (EMA):
The chart shows for GBP/CAD to break out of the consolidative phase a move above the 21-day EMA at 1.8483 must happen.
And, as per the snapshot taken on Monday, the level is thus far resisting the advance, suggesting upside is still yet to be realised.
We think the GBP could struggle against the CAD and other major currencies into the budget, due midweek.
There's a lot at stake for the UK and the pound is hoping that the contents of the document to be presented by Chancellor Rachel Reeves will put an end to months of uncertainty.
Currencies dislike uncertainty, and the budget has provided enough uncertainty to keep GBP undervalued.
Should the budget steer clear of any controversy, there could be enough risk premium erosion to help GBP/CAD and other sterling exchange rates move higher.
The obvious tail risk is that Reeves presents plans that are simply not credible. Analysis from Goldman Sachs shows she will need to raise about £30BN in taxes to keep her fiscal rules intact.
She is constrained by a Labour Party manifesto pledge to not raise the big taxes of National Insurance, VAT and income tax, which means there's a lot of fiddling to come.
The risks with such an approach are two-fold: 1) they risk not raising anywhere close to what is intended and 2) they create negative second-round effects, such as strangling growth out of the economy.
So, risks are high.
For now, we see a preferred scenario where she pulls it off and lives another day, but note a non-negligible risk that it all goes south.