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The Australian Dollar starts the new week on a soft footing owing to disappointing Chinese data.
The Aussie has had a good run of it lately against the pound, advancing for a straight five days into last Friday's close.
This advance pushed the Pound to Australian Dollar exchange rate (GBP/AUD) through an area of resistance at 2.0485-2.0419 and to the big 'line in the sand' that starts at 2.0342.
Above: Big support holds for now.
It is here that support stretches right back to March, and it is here that Sterling must mount a last-ditch attempt if it is to avoid completely relinquishing its long-term period of appreciation.
The exchange rate started the new week at 2.0388, a level that is below the nine-day exponential moving average (EMA) at 2.0489. The Week Ahead Forecast model judges an exchange rate to be in a near-term downtrend while below this level, which leaves us bearish ahead of the new week.
To be sure, GBP/AUD is rising off the big support zone we mentioned at the time of writing, helped by AUD's negative reaction to a disappointing data dump out of China.
The world's second-largest economy reported an above-consensus expectation unemployment rate of 5.3%. Industrial production disappointed at 5.2% y/y, massively undershooting the conesensus bet for 5.7%. Retail sales missed at 3.4% vs. 3.8% expected.
So we have consumer-facing and industrial sectors disappointing, which is leading Chinese proxies like the Aussie dollar to underperform.
Although GBP/AUD starts the week with a rise, we think the pressure can build again through the middle part of the week as investors face up to the reality of a Federal Reserve rate cut.
The cut should be the first in a series of cuts, which will lower the cost of capital in the world's largest economy and boost the global economic pulse.
Consensus projections for the next four quarters, compiled from leading investment banks.
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This is highly beneficial to risk-sensitive and global-facing currencies like the Aussie. In fact, GBP/AUD's steady decline since mid-August can be linked to improving sentiment linked to growing odds of further Fed rate cuts.
The best hope for a GBP/AUD break higher would rest with a disappointing Federal Reserve decision whereby rates are cut but the Fed pushes back against generous market expectations for further such moves.
"With an estimated three 25bp cuts by year-end — starting at this week's Fed meeting — and c.150bp by the end of next year, however, even larger downside misses in employment statistics are required from here for policy to enter accommodative territory, which is a nontrivial bar to clear," say foreign exchange strategists at Barclays in a weekly note.
Much will also depend on the UK side of the GBP/AUD equation, with labour market, inflation and retail sales data all due this week.
The Bank of England's Thursday policy decision could also be consequential, particularly if the Bank reaffirms a committemnt to keeping interest rates unchanged owing to fears that inflation is rising too far from the 2.0% target.
The UK's base interest rates is superior to that of Australia's, and this can limit GBP/AUD downside, even if the pair looks to be under short-term pressure.
