Australian Dollar Forecast to Suffer Further Declines Against the Pound Over Coming Days

Our projections suggest Pound Sterling is likely to extend its young recovery against the Aussie Dollar over coming days

• GBP into AUD reference = 1.7245
• AUD into GBP = 0.5798
• Shorter-term technical recovery written in the charts
• Longer-term recovery unlikely until clarity on EU-UK relationship is delivered

The Pound to Australian Dollar exchange rate continues to recover from the base at 1.68 on a combination of Sterling rebalancing from undervalued conditions and a run of better-than-forecast UK data releases.

Yet, the GBP/AUD remains about 12% lower than where it traded on the eve of the EU referendum, confirming the pair is forming a base, at best.

Any sustained recovery remains distant at this stage and Sterling is unlikely to recover notably until there is more clarity on the UK’s new relationship with the EU.

This unlikely to be resolved for some time yet, so Sterling is likely as a consequence to remain subdued. We do however note that those politicians who lead the Leave campaign are getting increasingly frustrated by the slow progress being made on Brexit.

If they were to force the Prime Minister into entering talks befor she, or her team are ready, this could be a big negative for Sterling.

It is therefore worth highlighting that politics remain a major driver for the currency, and any news related to exit negotiations is likely to have a disproportionate impact on the Pound.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0112▼ -0.24% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9428 - 1.9509
**Independent Specialist	1.9831 - 1.9911 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Analysts at Barclay’s have calculated a 3.2% ‘political uncertainty’ premium, which is likely to be recouped should the UK maintain full trading rights to the EU.

The Australian dollar should meanwhile remain supported as recent positive employment data suggests the Reserve Bank of Australia (RBA) will not cut interest rates any lower in 2016, having already made two 0.25% cuts in 2016.

This may continue to keep carry trade inflows high, and is therefore supportive of the Aussie.

‘Carry’ occurs when investors borrow in a low interest rate currency, such as the euro and invest the money in a higher interest rate country’s bonds, such as Australia, enabling them to profit from the difference.

The side-effect of this investment strategy is increased demand for the Australian dollar, which rises in value.  

Credit Suisse’s head of advisory, Bob Parker, said on Bloomberg News recently that the ‘carry trade’ trumps all other considerations in the valuation of the Aussie, indicating a positive outlook for the currency.

Nevertheless, he was less optimistic about another key determinant of the Aussie’s value, commodity prices, such as those for metals like Copper and Iron Ore, which are key exports of Australia, arguing there was little upside left to them as a result of China’s gradual slow-down, since China, is by far, the largest consumer.  

Technical Outlook for the GBP Against the AUD: More Upside

The daily chart (see below) of the GBP/AUD pair shows a broad down-trend which began at the May highs.

This reached a new low on August 15 at 1.6721 before rebounding.

The pair then had three up days in a row forming a rough ‘Three White Soldiers’ Japanese candlestick pattern, which is a bullish indicator.

In the process it also formed another bullish pattern called an ‘Three Outside Up’.

These patterns increase the probability that more upside will follow.

The pair may also have completed a full Elliot Wave from the May highs, further increasing the possibility of a bullish reversal taking shape.

MACD, a momentum indicator, is also turning up in the lower panel, indicating potentially more upside.

On the four hour chart (see below) the pair has formed a classic three-wave a-b-c correction in its rebound.

This could still indicate a possible resumption of the down-trend is imminent, however, given the other more bullish technical signals mentioned above, and the fact upside momentum is especially strong in the correction, there is also a chance the a-b-c might actually be the start of a stronger bullish move higher.

We would want to see a move above the 1.7260 correction highs for confirmation of a bullish move higher, to a target at 1.7310 initially, followed by 1.7450-60.

Alternatively, given the bearish fundamentals a break below the 1.6875 level would provide strong confirmation of further downside to a target at 1.6750.

Data in the Week Ahead

There is no top tier data out for the Aussie in the week ahead, however, there is a tier two release in the form of Construction Work Done for Q2, which is released on Wednesday and Private New Capital Expenditure for Q2 on Thursday.

For the pound, the week kicks off with the Consortium of British Industry’s (CBI’s) Order Book Balance for August on Tuesday 23.

This is mainly of interest because it is for the month of August, so may gain extra attention due its significance in assessing the impact of Brexit.

The July result was -4, which was better than the -6 expected, and was at about the level of the long-run average.

Wednesday sees the release of British Banking Association (BBA) Mortgage Approvals data, which is of limited import to sterling.

There is more significant data out on Friday, however, including Q2 Business Investment (qoq), and then the final estimate of Q2 (qoq) GDP growth data.

The preliminary figure was 0.6% and the consensus estimate for the revised figure is expected to remain at 0.6% qoq (2.2% yoy).

The data, however, does not reflect the impact of Brexit which occurred right at the end pf the period.