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Australian Dollar at Risk of Further Short-Term Declines vs. the Pound over Coming Days

Australian Dollar

Image © Greg Brave, Adobe Stock

- GBP/AUD could rise to upper 1.81s

- Bullish bottoming pattern breaks out higher

- Main release for the Pound is PMI data and for Australian Dollar Chinese manufacturing data

The Australian Dollar is up against most counterparts at the start of the new week, but unchanged against a stronger Pound, on expectations of progress in trade talks between China and the United States, although market sentiment remained fragile over looming concerns of slowing global growth and a partial U.S. government shutdown.

U.S. President Donald Trump said on Sunday that he had a "long and very good call" with Chinese President Xi Jinping and that a possible trade deal between the United States and China was progressing well. The Aussie Dollar's positive reaction confirms external drivers - particularly sentiment on China - remain in control of the currency from a fundamental perspective.

The Pound-to-Australian Dollar exchange rate is quoted at 1.0822 at the time of writing, up marginally on the previous week, suggesting the gains enjoyed by the Aussie against the U.S. Dollar have had little impact on a broadly firmer Sterling.

From a purely technical perspective we note GBP/AUD has completed a bullish reversal pattern which indicates the likelihood of more upside. The pattern is called an ‘inverse head-and-shoulders’ (H&S) and is composed of three consecutive lows, the middle trough of which (the ‘head’ or ‘H’) is the lowest.

GBP to AUD daily

The inverse H&S is a bullish reversal pattern with the ‘trigger-point’ for a rally occurring after a break above the ‘neckline’. GBP/AUD has already successfully pierced the neckline at 1.7815 increasing the probability of more gains.

Although GBP/AUD pulled-back after peaking three weeks ago, it has resumed its uptrend. The pull-back after the neckline break was probably just what analysts call a ‘throwback’, which is quite a common occurrence after a breakout but only represents a ‘pause’ before a continuation higher.

The expected upside target is equivalent to the height of the inverse H&S from its lowest trough to the neckline, extrapolated by 61.8%. This suggests an upside target at 1.8185. A break above the 1.8052 highs would provide renewed confirmation.

The pair has now also pierced clearly above the 50 and 200 day MAs in the 1.78/79s, which is another bullish sign. Major MAs are usually tough obstacles so the fact these have been overcome by GBP/AUD is a positive sign.

The short-term bullish outlook is also in line with the longer-term uptrend from the October 2016 lows. The pair has also now managed to clearly break above the 50-week MA on the weekly chart further suggesting a bullish bias.

GBP to AUD weekly

Note that while the spot GBP/AUD exchange rate is 1.8035, banks are offering rates between 1.7390 and 1.7518 for international payments. Independent specialists are offering in between 1.7860 and 1/7930.

 

The Australian Dollar: What to Watch

AUD

The most important release for the Australian Dollar in the week ahead is probably Chinese data given the Aussie’s sensitivity to the health of its largest trading neighbour’s economy.

China NBS manufacturing and non-manufacturing PMI is out at 1.00 GMT on Monday, December 31. The former is forecast to show a fall of a basis point to 49.9 from 50.0 in December. A move below the key 50.0 threshold is a sign of contraction rather than expansion and would be negative for AUD.

Another gauge of Chinese manufacturing, Caixin PMI, is out on Wednesday at 1.45 and is forecast to show a fall to 50.1 from 50.2 in December.

Australian data is confined to the final estimate of Commerzbank Australian PMI out on Tuesday and Thursday at 10.00, we don't expect the data to have any significant bearing on the Aussie.

 

The Pound What to Watch this Week

GBP

The main release for Sterling in the week ahead is probably key sector PMI data for December.

The first sector data scheduled for release is Manufacturing PMI out at 9.30 GMT, on Wednesday, January 2. This is forecast to show a slowdown in manufacturing activity to 52.5 from 53.1. A greater-than-expected slowdown would be bad for the Pound.

Next comes Construction PMI on Thursday at the same time. This is forecast to show a slight fall to 52.9 from 53.4 in December.

Finally, Services PMI is out on Friday at 9.30 and is forecast to show a rise to 50.7 from 50.4. Services is the largest sector in the UK and, thus, is probably the most important of the three. Just like in the case of Manufacturing, a greater-than-expected slowdown would be detrimental for the Pound.

The rest of the data from the UK is unlikely to move the Pound much. Nationwide house prices are out at 7.00 on Friday when they are expected to show a 0.1% rise in December from the previous month.

Consumer credit and mortgage lending data is also out on Friday at 9.30. Consumer Credit is expected to show a rise to £0.95bn in November from £0.9bn in October. Mortgage lending is forecast to fall from £4.1bn to £4.0bn, month-on-month in November.

Brexit headlines are also likely to drive Sterling in the week ahead, although given Parliament is in recess their importance may be more circumstantial than key.

Those looking to lock in a GBP/AUD exchange rate ahead of a potentially volatile month and year should do so over coming days as we expect volatility to be relatively low ahead of the key Brexit vote mid-month. If you lock in an exchange rate for a major international payment you can set aside any concerns on what this volatility might deliver, find out more here.