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- GBP declines to support but rebound possible.
- Rising trend channel provides bullish backdrop.
- Wage data in focus for Sterling and Aussie Dollar.
The Pound-to-Australian Dollar rate is trading at 1.8130 early on Tuesday of the new week after losing -1.10% last week, but is poised to edge higher over the coming days.
The Reserve Bank of Australia (RBA) confirmed its shift to a neutral interest rate stance this month with the release of minutes from its latest meeting during the overnight session.
The minutes suggest the bank will be watching the housing market closely for signs of further price falls being the in the pipeline as these have the power to deter consumer spending, potentially resulting in slower GDP growth, higher unemployment and lower inflation.
"We changed our RBA view last week after the shift to a neutral bias. We expect the cash rate to remain unchanged for the foreseeable future (until November 2020) at the earliest. However we see the risks over the 2019 as tilted toward the downside as the housing market continues to adjust lower and impact the consumer. Developments in the labour market will also be important to watch for direction of the RBA. But the hurdle to cut rates remain high in our view," says Josesph Capurso, a strategist at Commonwealth Bank of Australia.
Above: GBP/AUD rate shown at weekly intervals.
From a technical point-of-view, the outlook for the pair is marginally bullish despite its poor performance last week. GBP/AUD continues oscillating within a rising channel but if it can break above the 1.8522 highs it will probably confirm a continuation of the rising channel higher to the next target at 1.8725.
Despite multiple signs of weakness making a bullish forecast rather tentative they are not enough yet to reverse the trend and change the outlook.
Above: GBP/AUD rate shown at monthly intervals.
The 50-month MA is capping gains on the monthly chart at 1.8329 and has repeatedly rejected attempts by the exchange rate to break above it, and whilst these repeated attempts at breaking higher can presage an eventual successful break, they are on balance a bearish indicator.
Above: GBP/AUD rate shown at daily intervals.
The daily chart shows how the pair has recently fallen to a key level at a trendline drawn from the December lows. It is also currently just above the level of the 50 and 200-day moving averages (MA). The three levels combined provide a tough support level for the pair which could help provide it with a base from which to launch a recovery higher.
Whilst there is a possibility the exchange rate could break below this floor, the overall outlook remains bullish with confirmation supplied by a break above the 1.8522 highs, confirming a continuation of the rising channel higher to the next target at 1.8725.
The Australian Dollar: What to Watch
Wage and employment data, sentiment surveys and the minutes of the last Reserve Bank of Australia (RBA) policy meeting are amongst the main releases in the coming week for the Australian Dollar.
Australian wage data is released on Wednesday at 00.30 GMT in the form of the ‘wage price index’ which is forecast to 0.6% quarter-on-quarter in Q4 (2.3% year-on-year) the same as it did in Q3. A higher-than-expected rise would be positive for the economy and probably result in a recovery for the Aussie (downside for GBP/AUD).
Employment data for January is out at 00.30 on Thursday when it is forecast to show the unemployment rate still at 5.0% and employment rising by 15k in the month overall. The rise in full-time jobs as a proportion of the total is a key metric to analyse to ascertain the impact on the economy and therefore the Aussie.
The other main release are the minutes of the RBA February meeting at 00.30 on Tuesday. The RBA’s stance at the last meeting was neutral after it highlighted a multitude of risks, including the global slowdown, subdued inflation growth due to a lack of wage inflation, and a weakening housing market. If the minutes of the meeting reinforce these concerns it could weaken AUD.
Recent forecasts from UBS and CBA have highlighted the risk of a downturn in the Australian housing market impacting negatively on more general growth, inflation, interest rates, and the Aussie Dollar.
If the minutes reveal deeper fears about the Australian economy amongst the RBA governing council it will weaken AUD, however, they will probably reflect a mix of views and balanced neutral outlook.
The Pound: What to Watch
Brexit developments will likely remain the main driver for the Pound over coming days.
Over the weekend news reports suggest French President Emmanuel Macron "and other European countries are ready to give Britain legally binding assurances that the Irish backstop is temporary".
"President Macron of France has softened his line in recent weeks to aid a last-ditch attempt by the EU to help get the withdrawal agreement across the line next month," says Bruno Waterfield, Brussels Editor at The Times.
UK Prime Minister Theresa May is currently engaged in negotiations with the EU to win changes to the Irish backstop mechanism: that piece of the Brexit Withdrawal Agreement that could ultimately see the UK locked into the EU's single market and customs if ever triggered.
Legislators in the UK parliament in January rejected the Brexit deal and asked the Prime Minister to deliver substantial changes to the Irish backstop if they were to pass the deal.
For Sterling, the passing of a deal is seen as a best-case scenario as it eliminates a 'no deal' will simultaneously provides at least two years of legislative stability for UK and EU businesses.
"Macron to the Pound’s rescue," says Viraj Patel, foreign exchange strategist with Arkera. "GBP has been broadly stuck in a 1.27-1.32 range since Sep (breaking out only at extreme times of Brexit pessimism/optimism). At 1.28-1.29 we’re in the pessimistic-neutral state, so news like this will on the margin lift."
Looking at the data calendar, the key release for the Pound will probably be employment and wage data out on Tuesday at 9.30 GMT.
The figures come out against a backdrop of falling inflation and broadly waning growth which have brought into question expectations that the Bank of England (BOE) will start raising interest rates as soon as the fog of uncertainty around Brexit has cleared.
“After the worrying GDP numbers for December, a weak set of jobs figures could spark more concerns that the never-ending Brexit saga is starting to have a more profound impact on the UK economy,” says XM.com's Boyadijian.
The unemployment rate remains at historic lows so the key market focus will shift to average weekly earnings in December. If these have increased to 3.5% year-on-year, as forecast, it could push up the Pound. Higher earnings would probably push up interest rate expectations and higher interest rates tend to have a supportive effect on the currency because they attract greater inflows of foreign capital.
“The jobless rate is predicted to have held at 4.0% in the three months to December, while average weekly earnings are forecast to have increased by 3.5 y/y during the same period, accelerating slightly from the prior 3.4%. Faster wage growth could be seen as offsetting some of the negative effects of lower oil prices on the consumer price index, which fell to 1.8% y/y in January,” says Boyadijian.
Another key data releases is the CBI Industrial Trends survey, which can provide a leading indicator for the economy. It is forecast to show a fall to -5 in February from -1 previously.
Public Sector Net Borrowing for the UK in January is out on Thursday at 9.30, and is followed by a speech from BOE’s chief economist Andy Haldane.
The CBI Distributive Trades survey in February is out at 11.00 on Thursday.
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