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The British pound holds the upper hand against the Australian dollar heading into Tuesday's Reserve Bank of Australia decision, with a hike already in the price and the Bank of England poised to act two days later.
The Pound to Australian Dollar exchange rate starts the week at 1.9128 after rebounding from a low of 1.8859 last Thursday, and we look for sterling to keep the advantage in the coming days.
Stepping back, the pair is trading in a range that has been compressing since the summer, a pattern that points to lower volatility over the next couple of weeks before a larger breakout.
From a technical perspective, two converging trendlines, shown in turquoise on the chart, have defined GBP/AUD's range since the summer, and the pair now sits close to the upper line:
GBP/AUD daily chart. Image © Pound Sterling Live, chart created with TradingView.
The upper line runs down from the July high at 1.9362 and capped the mid-October rally at 1.9228. The lower line rises from the May low at 1.8540 and held the pair on the dips in September and again last week.
What does a flag pattern denote? It tells us buyers and sellers are pushing the pair into an ever-narrower range, with each high lower than the last and each low higher. Volatility tends to fall as the lines converge, before the pair breaks out of the pattern, often sharply, in one direction or the other.
Sterling has the edge in the near term, with GBP/AUD back above the 100-day average, drawn in blue at 1.9030, and the RSI in the lower panel turning higher to 58.
We look for GBP/AUD to test the upper trendline near 1.9140 this week, with the 100-day underpinning dips. A daily close above the line would open the way to 1.9228 and then 1.9362, while a daily close back beneath 1.9030 would change Pound Sterling Live's near-term Pound to Australian Dollar forecast.
Further out, the lower trendline, now near 1.8975, marks the line that must hold for the pair to keep its sequence of higher lows since May, and a break of either line in the coming weeks is likely to set the pair's direction into year-end.
Last week Pound Sterling Live expected the 100-day to anchor GBP/AUD near 1.90, with risks tilted lower. The pair dipped to 1.8859 on Thursday after strong Australian inflation data but recovered to close the week back above 1.90.
What the RBA Must Do to Lift the Australian Dollar
Should the Reserve Bank of Australia raise rates on Tuesday and signal that more hikes could follow, the Australian dollar would gain fresh support. A hike alone is unlikely to be enough, because markets already price a better than 80% chance of one, as Pound Sterling Live reported.
The RBA announces its decision at 03:30 London time on Tuesday, with consensus looking for an increase in the cash rate to 4.85% from 4.60%. Under the playbook, hawkish guidance that points to further increases would lift the Australian dollar, while a hike framed as a one-off would weigh on it.
Third-quarter inflation figures cemented the case for a move last week. Trimmed mean inflation, the RBA's preferred measure, rose 1.0% on the quarter, above the 0.8% the RBA pencilled in for its August forecasts, and annual headline inflation reached 4.3% in September.
"We reaffirm our expectation that the RBA Monetary Policy Board will again increase the cash rate at the November meeting," says Luci Ellis, Chief Economist at Westpac, in the bank's Australia and New Zealand Weekly. Ellis expects a majority of the board to back the hike, though some members might dissent.
Westpac does not see the RBA going further for now, "while we still expect a hawkish tone in the RBA's communication until inflation has clearly turned down, further hikes beyond next week are not currently our base case," says Ellis, adding that the risk of another hike, most likely in February, has increased.
Should the RBA hike and stop short of signalling more, as Westpac expects, the Australian dollar would have little left to price, and sterling would keep its advantage.
Australia's household spending figures on Wednesday, where consensus looks for a 0.2% rise, and the trade balance on Thursday are second-tier, as is a speech by Deputy Governor Andrew Hauser on Thursday.
The Bank of England Gives Sterling Its Own Catalyst
Economists look for the Bank of England to lift interest rates by a quarter point to 4.00% at noon on Thursday, and any signal that more increases may follow would reinforce sterling's advantage over the Australian dollar.
Lloyds expects a 6-3 vote for the hike but does not subscribe to market pricing for four hikes over the next 12 months, so a cautious message from the Bank would temper sterling's gains.
With an RBA hike already priced and the Bank of England set to follow, Pound Sterling Live's Pound to Australian Dollar forecast looks for sterling to hold the advantage this week and test the top of its range near 1.9140, while the narrowing pattern points to a larger move once the pair breaks out.
