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Pound-Australian Dollar Rate Looking Overbought

Australian Dollar outlook versus the Pound

Image © Greg Brave, Adobe Stock

- GBP comes off week's highs vs. AUD

- Charts suggest a risk GBP/AUD could weaken further

- Aussie consumer sentiment slumps

Our latest technical studies suggest the Pound could lose ground against the Aussie following a strong run that leaves it looking overbought.

The views comes following another good week for the Pound-to-Australian Dollar exchange rate which has recorded a 1.3% gain.

However, the pair has come off its weekly highs of 1.8860 and now reads at 1.8698 ahead of the weekend.

Our studies suggest the short-term weakness is consistent with the exchange rate reaching the top of a ‘broadening formation’ (BF) or ‘loudspeaker’ pattern which has formed on the GBP/AUD chart.

These patterns are usually composed of 5 waves labeled A-E but this one has only formed 4 so far, suggesting the final E-wave down is still to come.

GBP to AUD weekly chart

This could mean a decline is imminent.

Even an overshoot of the top of the BF should be treated with caution as this sometimes happens just before a move lower. Overshoots of rising trend lines are often a feature of exhaustion moves so we would be cautious of remaining bullish.

Yet at the same time we would only turn more bearish if there was a decline from the top of the pattern and more evidence to suggest the start of a new downtrend.

Until then we remain neutral though on the watch for the start of a new short-term downtrend.

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Poor Data Weighs on Aussie Sentiment

While the immediate outlook for GBP/AUD has softened, Sterling is nevertheless still looking to notch up a weekly gain on its antipodean counterpart.

Brexit aside, a key driver of GBP/AUD has been a softening in expectations for the outlook of the Australian economy.

The Westpac consumer sentiment index fell 4.8% in March to read at only 98.8 - only the second time it had given a reading below the key 100 level since 2017.

A result below 100 is onerous for the economy because it indicates pessimistic survey responses outweighed optimistic responses; a result of above 100, on the other hand, shows the majority surveyed are optimists.

Sentiment indicators are often seen as ‘leading’ the harder types of data so the result was not positive for the economy.

The question being asked by foreign exchange markets is whether or not the slowdown in Australian economic momentum is great enough to warrant interest rate cuts at the Reserve Bank of Australia (RBA).

Interest rate cuts would act as a stimulus to the economy, but would likely weigh on the Australian Dollar: The general rule-of-thumb being that currencies weaken when their central bank is cutting interest rates while other central banks are neutral or raising interest rates.

Analysts at the world's largest dealer of foreign exchange - Citibank - believe consumer sentiment is not yet at a level that corresponds to rate cuts. “Household sentiment retreats but not at levels to warrant RBA rate cuts,” say Citibank analysts in a recent note to clients. "At 98.8 points, sentiment is roughly 4 points above readings that have been followed by interest rate cuts in the past."

It is not just consumer sentiment which Citi think is still at levels too elevated to expect a rate cut - the NAB business survey - despite dropping several points at the last reading - is also too high to warrant a rate cut.

“Neither is business sentiment with the NAB business survey showing business confidence down by 2 points to a level of 2. This remains slightly positive and history shows this needs to be flat to negative ahead of interest rate cuts,” say Citibank.

The Citibank call on interest rates comes a week after one of Australia's largest lenders warned they see two interest rate cuts coming out of the RBA in 2019.

"We now think that the RBA will make two rate cuts in 2019. Growth appears to have lost significant momentum, placing at risk further improvement in the labour market at a time when inflation poses little constraint on policy and financial stability risks have abated," says Alan Oster, chief economist at NAB.

Who is right: Citi or NAB? If the former, then expect the Aussie Dollar to maintain an even keel, if the latter then expect the Aussie Dollar to weaken substantially.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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