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The Pound to Canadian Dollar exchange rate (GBP/CAD) is recovering and will be looking to retake some key technical levels in the coming days.
The Canadian Dollar was one of the FX world's best performers in the October-November period as it caught a ride on the U.S. Dollar's coattails.
However, Donald Trump's threat to levy a 25% import tariff on Canada upended the CAD rally and suggested the currency was not immune to Trump's tariff-lead geopolitical strategy.
The result was a 1.80% GBP/CAD weekly gain that put an end to a period of weakness for the exchange rate.
Looking at the charts, the daily Relative Strength Index has risen to a more neutral reading of 50 while still pointing higher, which is consistent with ongoing recovery potential in GBP/CAD.
The rally takes the pair to a confluence of the 50-day moving average (DMA) at 1.7828 and the 21-DMA at 1.7798.
We will need to see a break above the 100 DMA in the coming week if the nascent uptrend is to mature into something more sustainable.
A test of 1.7950 then becomes an objective for the next one to two weeks.
The key calendar event will be Canada's job data, due on Friday. Here, a strong reading can lower the odds of a 50 basis point interest rate cut at the Bank of Canada, potentially helping the CAD strengthen.
Analysts at Crédit Agricole think the Canadian Dollar can strengthen against the U.S. Dollar in December before coming under pressure again in 2025.
"CAD could thus benefit a little from the pricing out of the residual 20-25% chances of a 50bp December cut," says a note from the French-based investment bank.
The Bank of Canada will make its next announcement on December 11, and the rule of thumb is that the CAD can come under pressure if the Bank announces a 50 basis point rate cut.
However, a 25bp cut would be a lesser move, which would have 'hawkish' connotations and buoy the CAD.
Crédit Agricole thinks that unless Canada-U.S. relations turn more sour, as we saw when Trump threatened 25% tariffs on Canada, some profit-taking on long USD/CAD may still ensue ahead of year-end.
Analysts at the bank note that December seasonality is usually strongly negative for the pair, with five negative monthly returns out of the last seven Decembers, with an average of -0.8% over that period.
However, Crédit Agricole looks for renewed CAD weakness into early 2025, even when putting trade/tariff considerations aside.
That is because (1) the prospects of Canadian inflation settling just above 2% in the year ahead may look vulnerable following the sharper CPI cooling of Q3 2024; and (2) Canadian money markets discount a Bank of Canada terminal rate of 3.0%, which Crédit Agricole thinks is too high and prone to a revision lower.
This can weigh on CAD.