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Pound-to-Australian Dollar Week Ahead Forecast: Limited Downside Potential

Aussie Dollar

Image © Robyn Mac, Adobe Stock

- GBP/AUD rangebound

- Break above significant highs or lows required to deduce trend

- Pound to be moved by PMI data; Aussie by RBA minutes.

The GBP/AUD exchange rate is trading at around 1.7918 at the start of the new week, 1.12% higher than a week ago.

The downside move that characterised the May-July period looks to have faded and the exchange rate is showing signs of consolidation, we look for a break higher or lower above key levels to confirm the next directional move.

The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair trading in a range between roughly 1.8000 and 1.7700.

four hour GBPAUD

If anything, the range looks more likely to eventually break lower rather than higher given the patterning of the market and there is a possibility of a third leg moving lower to a target at 1.7615 eventually, conditional upon a break below 1.7705.

Even the shape of the RSI momentum indicator in the lower pane suggests it is more likely to fall than rise.

A further break below the range lows, confirmed by a move below 1.7600, would provide confirmation of more downside to a target at 1.7170.

A break above 1.8200 would probably lead to a move up to 1.8535.

Both these targets are based on the extrapolation of the height of the range higher or lower, the usual method for forecasting range extension.

The daily chart shows a similar picture but with wider medium-term targets.

Daily GBPAUD chart

A break above the current range highs, for example, would lead to a move up to a target at 1.8770 whilst a break down would probably lead to a fall to a target at 1.7200, and the December lows.

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 with even wider, longer-term targets higher or lower depending on which side the break occurs at.

Weekly GBPAUD chart

A break lower might lead to a move down to an even deeper target at 1.6960 in the long-term, whilst a move up could reach a target at the 2019 highs and circa 1.8880.

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The Australian Dollar: What to Watch this Week

The most important release for the Australian Dollar in the week ahead is probably the release of the Reserve Bank of Australia (RBA) minutes at 2.30 BST on Tuesday morning, followed by a gauge of construction called ‘construction work down’ out on Thursday.

“The minutes of the Reserve Bank of Australia’s August policy meeting, due on Tuesday, will likely reinforce the view that additional rate cuts will probably be needed to support the Australian economy,” says Raffi Boyadijian, an investment analyst at FX broker XM.com.

If true, then the Australian Dollar could weaken as a result of a cut in interest rates since lower interest rates tend to reduce net foreign capital inflows.

"AUD upside is limited in our view because global momentum is slowing and there are heightened economic risks. Further adding to downside risks is the fact that the RBA looks set to deliver more policy easing because the unemployment rate remains stubbornly high and leading indicators of the labour market are soft," says Kim Mundy, a strategist with CBA in Sydney.

The RBA held pat at their last meeting after two consecutive 0.25% cuts in a row - the question now is whether they will restart monetary easing and make further cuts.

Whilst XM.com seems to think there is a high chance of this happening, other analysts point to the possibility of an upturn in the business cycle in H2, which could support the currency. This may already have been heralded by the recent better-than-expected employment data.

The other release - construction work done - is linked to Australia’s vulnerable housing sector and although there is no consensus forecast, the metric fell -1.9% in the first quarter. Any further weakness could sound alarm bells for the housing market and although unlikely to directly move the Aussie, it could impact on RBA interest rate decision-making, which does impact on the Aussie.

The Aussie also tends to be sensitive to global risk sentiment and the G7 meeting, starting on Friday as well as the Jackson Hole symposium of central bankers, starting Thursday, could both also impact the currency, especially if there are reports of more dovish commentary (dovish meaning in favour of lower interest rates) as seems possible.

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