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Australian Dollar's Outlook vs. the Pound Deteriorates with Break of Key Trendline

Australian Dollar

Image © A. Strode, Adobe Stock

- GBP/AUD breaks above trendline - more gains seen

- Momentum strong and supportive of more upside

- Gains driven by EU dismissing ‘managed no-deal’ option

The Pound-to-Australian Dollar exchange rate is trading in the 1.76s at the time of writing, its fifth consecutive up day in a row with a chunky 0.2% advance on Tuesday, December 18 taking the pair to 1.7628.

In the process of advancing, Sterling has now pierced clearly above a major trendline and this indicates it will probably follow through higher.

GBP to AUD daily

Assuming the break holds on a closing basis or passes the 1.7665 confirmation level, it will probably reach a bullish target of 1.7765, based on an extrapolation of the length of the rally immediately prior to the break (labeled ‘x’).

The RSI momentum indicator in the lower panel is providing further supporting evidence for a bullish call. The RSI is currently at the same elevated level it was at on December 6 when it was trading at 1.7743. This indicates possible ‘pent-up’ energy which could be ‘given vent to’ as the pair rallies higher in the days to come.

In the very near term, however, GBP/AUD could pull-back temporarily.  Bulls should not be spooked by such a pullback as it is probably only likely to reach the just-broken trendline before ending. It is probably just a temporary pause before the next upthrust. Such retreats are called ‘throwbacks’ by technical currency analysts. They offer low-risk buying opportunities.

The fundamental outlook for Sterling does remain shaky with markets heading into a critical January for the Brexit process: We will learn whether or not Theresa May's Brexit plan has the ability to pass into law, or we will find out what the alternative is.

Until then, markets are happy to hold Sterling, ensuring when other currencies weaken the currency advances.

The decline in the Australian Dollar seen across the board is therefore the main instigator of GBP/AUD strength.

Global economic growth appears to be on the wane, lead by a slowdown in China.

With this in mind, Chinese economic policy will be in focus over coming days with the annual Central Economic Work Conference commencing today, this will see senior Chinese officials discuss ways to boost the economy at a time of slowing economic growth.

China Daily reported that the government plans to unveil “major” tax cuts which “could reach CNY1.5trn in 2019”.

If confirmed, the boost would be greater than expected and could prove positive to global stocks and currencies that do well in a positive risk environment: Think of the Australian and New Zealand Dollars as well as Emerging Market currencies such as the South African Rand.

Domestically, the Reserve Bank of Australia (RBA) meeting minutes released on December 18 hinted at a continuation of the current neutral, ‘no-change’ stance, saying, “there was no strong case for a near-term adjustment in monetary policy”, which was probably mildly negative for AUD (positive for GBP/AUD), and would have supported the uptrending bias.

Housing data meanwhile came out better than expected after showing a 3.6% rise in new home sales in November, following the previous month’s disappointing -0.8% fall. This would have been mildly supportive for the AUD side (and, therefore, negative for the exchange rate).

Many economists think the fragile housing market is heading for a major slump in 2019 so the rise in home sales in November would probably have helped ease their concerns. A decline in house prices would be expected to weigh on interest rates and the Australian Dollar.

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