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Pound-to-Australian Dollar Rate Week Ahead Forecast: Bears Take Over after Brief Recovery Fails

Australian Dollar

Image © Greg Brave, Adobe Stock

- GBP/AUD rolls over after short-term rebound

- Medium, longer-term charts look bearish

- Pound to be impacted by Conservative Party leadership contest + BoE decision

- Aussie by RBA minutes

The Pound-to-Australian Dollar exchange rate is trading at 1.8305 at the start of the new week, after rising almost 2 cents in the previous week. Nevertheless, studies of the charts suggest that the exchange rate will probably start falling over the next 5 days.

The 4-hour chart - which we use to determine the short-term outlook - shows the pair having broken below a key trendline for the move up from the start of June.

GBP to AUD four hour

We see this break following through lower over the next week, initially to a target at 1.8260 and then to 1.8185 eventually, where it is likely to find a floor. Confirmation for the second move is likely to come from a break below 1.8250.

We use the 4-hour chart to analyse the short-term trend, which means the next 5 days of trading.

Looking at the outlook over coming weeks, the daily chart also looks quite bearish as the pair appears to be forming what looks like a possible bearish tri-star topping pattern, which is made up of three doji-like candles at a high.

Daily GBP to AUD chart

This, combined with the touch of the major 50-day moving average (MA) at the highs, is a bearish indication since the 50-day presents a strong resistance line capping gains.

We see a good chance the pair will fall to support at 1.8185 from the 200-day MA over the medium-term, and then possibly to the key April lows at 1.8105.

The medium-term is the period we use the daily chart to analyse, which is defined as the next week to a month ahead.

Taking a longer-term view, the weekly chart shows a very bearish long-term picture owing to the formation of a broadening formation price pattern.

Weekly GBP to AUD

These are normally composed of 5 waves, labeled A-E and this one is probably in the process of forming wave E down.

Although the pair has bounced off support from both the 50 and 200 week MAs over the last few weeks the recovery looks unlikely to sustain and we think it is more likely the pair will resume its descent, to the next target at 1.7600 and the January lows.

We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.

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The Australian Dollar this Week: RBA Dominates

AUD

The main domestic event for the Australian Dollar this week will probably be the publication of the minutes of the Reserve Bank of Australia’s (RBA’s) June meeting, on Tuesday, June 18, at 2.30 BST.

At the meeting, the RBA cut interest rates because of slower growth. This would normally have resulted in a weaker currency, however, the Aussie actually rallied on the news. Investors had been expecting the RBA to explicitly announce a series of rate cuts, however, the Bank stepped back from that raising the possibility it could be a ‘one and done’ rate cut.

The minutes, therefore, could provide important information about what policymakers were really thinking about future rate cuts.

If there are hints in the minutes of support for a cut - at least from some of the RBA board it could put renewed pressure on the Aussie.

On the other hand, if the opposite is true and there was very little support for cuts the Aussie could rise

"The AUD has been short on luck. A weak external environment pushed it lower in 2018, but that recovery was not enough to lift it in 2019, as the domestic policy environment turned dovish. We have now broken support. How low the AUD falls will be defined by how aggressively the RBA eases and the success of Chinese stimulus efforts," says Daniel Been, a currency strategist with ANZ.

 

The Pound: Boris 'in the Price'

Pound

Brexit politics is still likely to have the greatest impact on Sterling, with the Bank of England (BOE) rate meeting, CPI and retail sales data also likely factors driving the exchange rate.

The race to become the next Conservative leader and Prime Minister will continue next week with the vote to decide who goes through to the next round late on Tuesday, June 18. This time the seven remaining contestants will need at least 32 votes to get through to the next round.

More rounds of voting are expected on Wednesday and Thursday at which MPs will finally whittle the contest down to just two remaining candidates.

These will then be put to a vote amongst the wider Conservative party membership.

The first round of voting amongst conservative MPs resulted in a clear win for Boris Johnson, who gained 114 votes - significantly more than his nearest rival Jeremy Hunt, who came second with 43. Michael Gove was third with 37.

It is widely expected that Boris Johnson will win the wider vote amongst Conservative members. It seems highly likely, therefore, he will be the next Prime Minister.

Markets are more-or-less accustomed to this outcome by now, and we therefore wonder if this outcome is already 'in the price' of Sterling: i.e. it is not a Johnson win that will move Sterling, instead we believe it is what he says about his intentions on Brexit that will most likely matter going forward.

We know Johnson favours a renegotiated deal with the EU, and a 'no deal' Brexit is not his preferred outcome on October 31.

However, if the EU are unwilling to renegotiate he has indicated that he will pursue a 'no deal' Brexit.

Therefore a Johnson win is not necessarily bad for Sterling, instead the key issue going forward will be how the EU reacts to his advances for a renegotiation, and his subsequent response.

As such, be wary of a potential recovery in Sterling over coming days as there is a chance market's pare back on their expectations for a 'no deal' Brexit.

"BoJo is likely the new PM in UK once the dust settles after all the balloting over the next few weeks. The thing that we look forward to the most, is when BoJo takes May’s deal to the commons again, just with a new name. We would by the way prefer to buy GBP, once Boris is confirmed as the PM – buy the rumour, sell the fact (in EUR/GBP)," says Andreas Steno Larsen, an analyst with Nordea Markets.

 

Bank of England Meeting Could Prove Supportive

Another key driver of the Pound is the Bank of England (BOE) policy meeting on Thursday, June 20 at 12.45 BST. Although it is not accompanied by a press conference the minutes published after the meeting may contain important information which could drive Sterling.

The BOE has adopted a hawkish stance of late - hawkish meaning in favour of higher interest rates - owing to the country's solid Labour market. Higher interest rates would be positive for Sterling as they attract higher net inflows of foreign capital.

“Despite the growth worries, however, and the rising risks of a no-deal Brexit, the BoE is sticking to its central projection that some tightening in monetary policy will be needed over the next 2-3 years,” says Raffi Boyadijian, an economist at XM.com. “With no press conference or quarterly forecasts scheduled for the June meeting, the BoE is widely anticipated to repeat the same message in its statement.”

There are two risks: 1) that the Bank strikes a more cautious tone due to slowing global growth, largely resulting from U.S.-China trade tensions. This could send Sterling lower. However, we note the UK is less exposed to global trade dynamics than other economies, such as the Eurozone. Therefore, this risk might not come to pass.

Or, 2) the Bank strikes a more optimistic tone owing to the ongoing strength of the labour market that continues to generate increasing wages. This in turn threatens higher rates of inflation in the future. If the Bank notes this, the Pound could find support, or go higher.

 

CPI and Retail Sales

As mentioned, inflation is a key concern for the Bank of England, and by extension Sterling. The outcome of Wednesday's inflation numbers could therefore be important.

UK inflation data is expected to show a slower 0.3% and 2.0% rise on a monthly and yearly basis in May, from 0.6% and 2.1% in April, when data is released on Wednesday at 9.30 BST.

A higher-than-expected result might impact mildly on the Pound as it increases the chances of the BOE raising interest rates.

Retail sales are forecast to show a -0.5% and 2.7% change on a monthly and yearly basis in May, compared to the previous 0.0% and 5.2% changes respectively, in April, as the economy continues cooling.

A lower-than-expected result might impact negatively on the Pound as it would suggest the slowdown was more acute. Lower sales suggest a slowdown in GDP since consumers are the main driver of the economy.

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