Image © Bank of Canada
Three-way risks surrounding the war in the Middle East will determine how the pound-Canadian dollar exchange rate evolves this week.
The pound's recovery against the Canadian dollar has been capped by an important technical indicator.
The 200-day exponential moving average (EMA) is blocking progress at 1.8457; the pair has failed to advance above the indicator since March 19.
That makes for a formidable resistance zone:
200-day moving averages can be key pivot points over long horizons, and currencies, along with other assets, tend to get 'trapped' above or below their moving averages for months at a time.
So when you see something making a move one way or the other through the 200dma, you want to try to assess whether we are in for a new period of structural strength (weakness) above (or below) the 200dma moving average.
While below the 200-day EMA the GBP/CAD exchange rate risks reverting lower again, which would put 1.8150 in contention. If you have payment requirements, you should talk to your payments provider to put in place orders to protect against downside and benefit from when the market moves in your favour. You could potentially realise thousands more from your transfer versus a passive approach.
However, a break above the level opens the door to 1.86, which marks the start of a consolidation zone that protects the 2026 high at 1.88.
For such a decisive move to transpire, we would probably require the geopolitical risks coming out of the Middle East to evolve more decisively.
There are three-way risks with three-way outcomes for GBP/CAD:
1) Trump bombs Iran back "into the stone age" as he has been threatening over recent days. He's set a 1 AM BST deadline for Iran to reopen the Strait of Hormuz, and thus far it looks as though Iran won't yield. Here, GBP/CAD falls back to 1.8150 in the coming days as this represents a clear escalation.
The rule of thumb is that the CAD benefits alongside USD when the war escalates and oil prices rise.
2) Iran yields and agrees to open the Strait. Here oil prices drop sharply and GBP/CAD surges through resistance at 1.8457.
3) The status quo continues. This is the most likely outcome. Here, Trump avoids smashing Iranian civilian infrastructure by saying the Iranians have agreed to talk or that they have indicated a willingness to engage. Of course, that's an opaque outcome, and it means more of the same for the foreseeable future.
Here GBP/CAD muddles along just below the 200-day EMA for a while longer.