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- GBP/AUD rising within a bullish channel.
- Break above high will signal more gains.
- AUD benefits from supportive backdrop.
- GBP caught in headlights of Brexit bus.
The Pound-to-Australian-Dollar rate was trading around 1.8845 Monday after closing the previous week almost two percent higher, although studies of the charts suggest Sterling can rise further still, in line with an ascending channel.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair has started a new short-term uptrend since the October 10 lows.
This short-term uptrend is now forecast to continue all the way up to the top of the rising channel. A break above the 1.9094 highs would provide the greenlight for a continuation higher to a target at 1.9500.
Above: Pound-to-Australian-Dollar rate shown at hourly intervals.
The daily chart shows how the pair has been steadily rising ever since the July 30 lows, and how this uptrend has actually accelerated recently. Given the old adage that ‘the trend is your friend’ it is biased to continue.
If the pair reaches the 1.9500 target at the top of the range there is a risk it will start to fall back down within the range or perhaps go sideways for a while. 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.
Above: Pound-to-Australian-Dollar rate shown at daily intervals.
The weekly chart shows the bigger picture of the rising channel which began at the 2017 lows. As on the daily chart, it shows the pair in an uptrend which will probably continue to an eventual target at the upper channel line at 1.9500.
The pair has now also broken clearly above the 50 and 200-week moving averages (MA), a further bullish indication. The top of the channel will probably present tough resistance to the exchange rate and cap further gains.
There is a good chance the pair will start to fall back down within the rising channel following the pattern of previous tests of the upper channel line, and it could fall back down to a target at 1.8500.
The weekly chart is used to give us an idea of the longer-term outlook, which includes the next few months.
Above: Pound-to-Australian-Dollar rate shown at weekly intervals.
The Australian Dollar: What to Watch
The Australian Dollar is likely to trade with the advantage of a supportive backdrop in the near-term as previous factors which had kept it pressured appear to have eased, and the economic calendar has fallen quiet.
The Aussie rose sharply on Friday after Australian labour market data showed an unexpected fall in unemployment in September to 5.2% which is closer to (but still not at) the optimum rate of between 4.5% and 5.0% suggested by the Reserve Bank of Australia (RBA).
Whilst some analysts are sceptical about the data - they say Australia still has a long way to go before 'full-employment' - most agree the data has bought the RBA time before it has to cut interest rates again.
“Our view is that while September’s slight fall in unemployment may have bought the RBA a bit of breathing space and that the list of positives Governor Lowe refers to will help avoid a recession, we doubt growth will be strong enough to achieve full employment and get inflation back to target anytime soon,” says Dr. Shane Oliver, chief investment strategist at AMP Capital.
The bottom line is that the better employment data has lowered expectations that the RBA will cut rates at their next meeting in November and this supported the Aussie.
Lower interest rates are generally negative for a currency since they reduce foreign capital inflows, so the lower probability of a November rate cut helped support the Aussie Dollar.
The Australian currency is also supported by easing trade tensions between the U.S. and China. The 'phase 1' deal has been agreed and is being written up for sign off. The fact that protests in Hong Kong have been ring-fenced and treated separately has further eased investor concerns.
“It looks like HK is being treated separately to the trade issue and Chinese officials have confirmed that they are still working on the text of the trade deal with US negotiators,” says Dr. Oliver. “The trade issue could still have flare ups, but the intense economic pressure on both sides to de-escalate means that we have probably seen the worst in terms of trade war angst, at least until after the US election next year.”
The Aussie can be heavily influenced by the Chinese economy given the close trade ties between the two and recent data has shown exports under pressure.
"Growth momentum in September picked up slightly in retail sales and industrial production and credit and money supply growth were stronger than expected suggesting that monetary easing may be flowing through,” says Dr. Oliver.
All in all the Aussie may benefit from a benign backdrop, assuming the international environment remains supportive.
The Pound: What to Watch
Pound Sterling starts the new week softer than where it finished the previous week, and the currency faces another volatile few days, with focus remaining on the UK Parliament where MPs will potentially vote on the Brexit deal, the passing of which will almost certainly allow the currency to test fresh multi-month highs against the Euro.
A number of UK news outlets and commentators have done the number crunching, and there is a sense that Prime Minister Boris Johnson could well have the numbers required to pass a deal.
Such an outcome would be bullish for UK assets, including the Pound.
Should a deal pass we look for Sterling to press higher against the Euro, Dollar and the majority of global currencies.
Monday will see the Government attempt to once again bring to Parliament a meaningful vote on the Brexit deal secured last week with the EU.
Saturday saw the Government pull the original Meaningful Vote, after Parliament voted to delay a vote on the Brexit deal, and it is therefore not certain a second vote on the same matter would be allowed by the Speaker John Bercow.
Regardless of Bercow's decision, Tuesday sees a programme motion on the Withdrawal and Implementation Bill brought to the House; this is the substantive legislation required to deliver Brexit. Therefore, in theory, by Tuesday Parliament will have delivered a fundamental vote on the Brexit deal.
"UK Prime Minister Boris Johnson suffered another setback on 'super Saturday' when the UK parliament delayed the meaningful vote on his new Brexit deal. Johnson even had to ask the EU for another Brexit delay, which he did in a decidedly odd way. However, the outcome is no reason to sell UK assets or sterling, in our view," says Kallum Pickering, Senior Economist with Berenberg Bank. "Johnson still plans to pass the necessary UK domestic legislation to implement the Brexit deal and to hold the decisive vote on his Brexit deal in parliament this week, with a first vote as early as today."
There is one issue to be aware of: remain MPs could again seek to amend either pieces of legislation which could once again delay a vote on Brexit. Talk over the weekend is that Labour will try and ammend legislation to include the UK staying within the EU customs union, and the holding of a second referendum. If either of these ammendments pass it is unlikely the Government will pursue passing the legislation.
Prime Minister Johnson is nevertheless determined to push on with delivering Brexit by October 31, and this keeps open the prospect of a 'no deal' Brexit happening at the end of the month.
"We are going to leave by October 31, we have the means and the ability to do so," Gove, the minister in charge of no-deal Brexit preparations, told Sky News.
"That letter was sent because parliament required it to be sent (..) but parliament can't change the prime minister's mind, parliament can't change the government's policy or determination," adds Gove.
Johnson on Saturday sent a letter to the European Union requesting a delay as the law required, but he did not sign it and he added another note saying he did not want a "deeply corrosive" Brexit extension.
"If there is a kneejerk negative GBP reaction as we emerge from the weekend with a greater overhang of uncertainty than hoped and some of the long positions established over the last week unwind, it should be faded. The weekend's events, if anything, further reduce the risk of disorderly exit and the decline in that risk and the associated risk premium in GBP should remain intact," says Adam Cole, a foreign exchange strategist with RBC Capital Markets.
If the market starts to increase pricing for a 'no deal' Brexit under a scenario where the Government pushes ahead with delivering Brexit on 'no deal' terms, or the EU 27 is unable to agree to an extension, Sterling will almost certainly start moving notably lower.
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