Last week, sterling touched its highest level against the Canadian dollar — also called the loonie — in more than a decade, reaching 1.9025, according ​to data supplied by LSEG. Historically, this pair has tended to retreat after hitting similar ​peaks, giving the market a breather before pushing to new highs.

If that pattern ⁠repeats, an initial target is likely to be 1.8560, which is the 55-week moving average — a ​line traders use to smooth out short-term noise and better identify the underlying trend. Moving averages often ​act as support, a zone where buyers tend to return. Should that support give way, the market could be drawn toward 1.8130, the monthly low from March this year.

The bigger question is whether the pound's long uptrend has ​the fuel for a deeper retreat. Interest rates offer one clue: UK rates have been higher ​than Canada's, drawing investors to sterling. But Canadian inflation has picked up while British price growth cools — a shift ‌that ⁠may heighten expectations that the Bank of Canada could lean toward tightening while the Bank of England holds steady, reducing sterling's appeal.

If the rally instead resumes and overtakes the recent high at 1.9025, traders will likely target 1.9285, the high from May 2016.

Also, potentially weighing in the Canadian dollar's favor ​is what traders refer ​to as positioning, or ⁠the size of bets that traders have placed for or against a given currency. Recently, speculative investors have placed much bigger bets against the Canadian ​dollar than they have against the pound. Traders often view this type ​of setup ⁠as a contrary indicator, meaning that the loonie might be oversold.

What the chart shows:

(Daily markets commentary from Reuters analysts on the signals financial charts are sending - and what they might mean.)