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Pound-to-Australian Dollar Rate Week Ahead Forecast: Looking For Confirmatory Break

Aussie Dollar week ahead

© Greg Brave, Adobe Stock

- GBP/AUD could move higher or lower

- Break above or below key levels to determine outlook

- Pound and Aussie to be moved by employment data

The GBP/AUD exchange rate is trading at around 1.7727 on Monday, 0.90% lower than at the same point last week.

The pair has started to sell off steeply after rebounding to a multi-week high at 1.82, reached on on August 07.

Although the overarching downtrend is still intact a break back below the trendline is required to confirm the downtrend.

We retain a neutral outlook over the next 5 days, with a break higher or lower above various levels required to confirm the next direction of the trend.

The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair moving back down after peaking at 1.8200. It remains unclear in which direction the short-term trend is going and the pair could end up going sideways for a time between the 1.8200 peak and 1.7560 prior lows.

GBP to AUD four hour

A break above or below either of these levels would provide stronger confirmation of trend direction.

A break above 1.8200 would probably lead to a move higher to a target at 1.8400 June highs.

Likewise, a break back below the 1.7560 lows would confirm a clear break below the major trendline and the onset of a more bearish trend down to a probable target at 1.7210.

The daily chart shows how the pair has moved lower after peaking and forming a bearish shooting star Japanese candlestick pattern on July 7 (circled). This is a bearish sign for the exchange rate, however, a break below the July 30 lows would be necessary to confirm an extension lower.

Daily GBPAUD

Such a move would be expected to fall to a target at 1.8200 before bouncing in the medium-term.

Likewise, a rally above the July 7 peak would provide confirmation of a bullish turn and probable extension up to a target at 1.8400 and the June highs.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows the pair in a long-term rising channel.

Weekly Chart

A break lower as outlined in the 4hr and daily time frame analyses might lead to a move down to an even deeper target at 1.7000 in the long-term, whilst a move up could reach a target at the 2019 highs and circa 1.8870.

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The Australian Dollar: Employment Numbers in Focus

AUD

The most important data releases for the Aussie in the week ahead are employment data on Thursday and Chinese data on Wednesday.

Australian employment data is forecast to show a 14k rise in July whilst unemployment is expected to remain at 5.8% when released at 2.30 BST on Thursday. This suggests a slightly positive result.

The data could impact interest rate expectations and therefore the Aussie. The Reserve Bank of Australia (RBA) has been aggressively cutting rates of late and this has been pressuring the Aussie lower since lower interest rates tend to weigh on currencies.

A worse-than-expected result could increase speculation of a further interest rate cuts from the RBA in September - current market expectations are around 40% of a cut then.

“Overall I don’t think the RBA will be in such a rush to cut again. Maybe they could pause for a little bit and see what happens with the economy. Particularly since the economy was relatively decent that month and the change in employment is expected to have risen a little bit. That would be a slightly encouraging development for the RBA and could slightly diminish the odds for a cut in September which, therefore, could lift the Aussie a little bit,” says Marios Hadryiacos, an investment analyst at FX broker XM.com.

Nevertheless, the influence of other drivers could still push the Aussie lower says the analyst.

“The broader outlook for the currency remains negative overall. You have the trade war casting a long shadow over the Australian economy and even if the RBA does not cut in September it will most definitely cut before the end of the year again. So there is very little to suggest a sustained rebound in the Aussie,” adds Hadryiacos.

Other Aussie data of note includes NAB business confidence which is expected to rise to 3 from 2 when it is released at 2.30 on Tuesday, Westpac consumer sentiment and the wage price index out early on Wednesday, as well as commentary from RBA assistant governor Debelle on Monday and Thursday.

The other key data release for the Aussie is likely to be Chinese data.

The main release is industrial production, which is expected to show a 5.8% rise when released at 3.00 on Wednesday.

A lower-than-expected result would weigh on the Aussie because it would reaffirm fears the Chinese economy was slowing down due to the impact of increased tariffs and restrictions with the U.S. and Australia is a close trading partner with China.

“The forecasts at least point to a slowdown in the Chinese economy.. We might see data come in slightly weaker and that could show the trade war is starting to inflict some real damage even despite the stimulus measures by the Chinese authorities, by the way. But what does that mean for the markets in general? It could affect risk appetite, the Yuan, the Aussie, and stocks,” says Hadryiacos.

Other Chinese data includes fixed asset investment and unemployment out at the same time, and new loans at 10.00 on Wednesday.

 

The Pound: Slew of Data on Tap

UK flag

The main drivers of the Pound in the coming week are likely to be Brexit politics, employment data on Tuesday, inflation data on Wednesday and retail sales on Thursday.

We note Brexit sentiment to be the overriding driver of Sterling: the market is in an ongoing process to lighten exposure to Sterling amidst rising expectations that the EU and UK will part ways without a deal on October 31.

“The Brexit story is by far the most important driver for the currency. The logic behind this is quite simple: if you manage to solve the political crisis most of the economic problems go away as well, investment picks up, uncertainty dissipates and growth reaccelerates,” says Marios Hadjikyriacos, an investment analysts at XM.com.

The only thing which can stop the Brexit juggernaut from going over the cliff now is a general election, however, this is unlikely to happen until after the summer recess in September, “so there is very little prospect for a rebound in the Pound over the next month, at least,” adds Hadjikyriacos.

But, the sharp drop in Sterling in response to last week's poor GDP reading served as a reminder that markets are still watching economic data.

Indeed, news that the UK economy shrank 0.2% in the second quarter of 2019 suggests that the economy - long a source of support for the Pound - is starting to flag.

We could see further selling triggered by any disappointing data readings this week.

We are particularly wary of a poor print in the wage growth data out on Tuesday.

Labour market data is forecast to show the claimant count rising by 42k in July, the unemployment rate staying at 3.8%, and average wages including bonuses rising 3.7%, when released at 9.30 BST on Tuesday.

3.7% is a fast rate for wages to be rising and ordinarily would lead to increased expectations the Bank of England (BOE) might have to intervene to cool down the economy by raising interest rates, however, this is unlikely to be the case, given the recent poor growth data and backdrop of Brexit risks.

Inflation data is expected to show a 1.9% rise in July compared to a year ago when it is released at 9.30 on Wednesday, which is almost exactly on the 2.0% BOE target rate.

Retail sales is forecast to show a -0.3% fall in July compared to the previous month when released at 9.30 on Thursday, and a 2.6% rise compared to a year ago. Both would mark a slowdown from the 1.0% and 3.7% in June.

If data comes out in line with market expectations it will probably lead to a stabilisation in the Pound, since it will reflect an economy growing at about the ‘right’ pace - or the goldilocks level, as economists are fond of calling it.

“The U.K. economy has shown varying goldilocks elements in recent months, and all three data bowls of economic porridge may be on display next week. Wage growth is, perhaps, in the “too hot” category, with average weekly earnings forecast to quicken further to 3.7% year-over-year for Q2...July retail sales are forecast to fall 0.3% month-over-month, which would be the third decline in the past four months...Finally, July CPI inflation released next week will likely remain close to the “just right” category...We believe the Bank of England is likely to remain on hold for some time,” says Wells Fargo in a preview note.

Given the surprising -0.2% slowdown in GDP growth which pushed the Pound down on Friday, there is a possibility the slowdown could be reflected in slightly worse than expected economic data in the week ahead, and if so the Pound could take a further hit.

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