The Pound is on the cusp of registering a two month best against the Australian Dollar as markets anticipate the better-than-expected run of post-referendum economic data from the UK to continue this week.
1 GBP buys 1.7702 AUD on the inter-bank market at the time of writing with the GBP/AUD continuing to extend the recovery that has been in place since mid-August.
The softer AUD is sympathetic to declines recorded by its fellow commodity bloc currencies who are all suffering as global markets have a mild panic-attack in anticipation of an impending US interest rate rise.
A speech by Boston Fed's Eric Rosengren on Friday the 9th September saw odds of an interest rate rise at this month's meeting rise to 30%. The news sent global stocks and commodity prices lower.
While a subsequent speech by the Fed's Brainard has pushed back on these expectations, it would appear the commodity dollar bloc is yet to fully recover.
The prospect of higher US interest rates reverberated through global markets which have reacted to the fact that borrowing in US Dollars is about to get a while lot more expensive.
This should slow global economic growth while reducing Australia's interest rate advantage over the United States - a long-term source of Aussie Dollar strength which caught crosses like the GBP/AUD in its gravitational pull.
The GBP/AUD pair has also advanced on the back of Friday's after Australian Home Loans data showed a -4.2% contraction in mortgage lending, which was almost three times deeper than expected.
The data indicated the possibility that the overheated Australian housing market might actually be cooling down, which would ease the way for the Reserve Bank of Australia (RBA) to cut interest rates in the future.
An agressive rate cutting regime would prove negative for the Aussie longer-term as the currency has for years been supported by vast foreign exchange inflows submitted by global investors seeking out the country's superior yield.
The RBA would like a lower Aussie dollar though as it would cement the growth of the non-mining sector whose produce would be more competitive on the international market owing to the weaker currency.
However, rate cuts have been hampered out of concerns that this would fuel a housing bubble.
Therefore, should the RBA be more confident that cutting rates won't fuel unsustainable house price rises, they could cut rates and pursue a weaker currency.
Latest forecasts from ANZ note that while the Aussie should stay supported in the near-to-medium term 2017 should be characterised by notable declines for the currency.
Indeed, by the end of 2017 the bank is forecasting GBP/AUD at 2.0.
Those with payments to Australia should note that bank accounts are offering in the region of 1.7207 and 1.7083 for international payments while indpendent providers are quoting between 1.7544 and 1.7420:
On the other side of the GBP/AUD pair, Sterling has seen an improvement in fortunes owing to better-than-anticipated economic news-flow.
The GBP/AUD pair has had an upside bias since the August lows, and a break above the 1.7677 highs would establish a young up-trend and potentially see the pair extending higher to an initial target of 1.7830.
This is where support and resistance kicks in from the R1 monthly pivot, a level used by traders to gauge the direction of the market.
From a technical point-of-view the charts favour the possibility of a break higher, and may have formed an inverse head and shoulders bottoming pattern at the lows, composed of three troughs, the middle one of which (the head or ‘h’) is the lowest:
A break above the neckline which runs across the top of the pattern, confirmed by a move above the 1.7677 highs, would signal a continuation higher.
The pattern is not clearly an inverse head and shoulders, however, and there is a possibility it could fail.
Nonetheless, another sign the trend may by changing is the break above the trend-line on Friday, which if consolidating would signal a new phase of upside strength.
The MACD indicator in the bottom panel is still above the zero-line, indicating the dominant trend is also up.
Data that Could Shake the GBP/AUD Over Coming Days
Australian Data in the week ahead kicks off with NAB Business Confidence on Tuesday and Westpac Consumer Sentiment on Wednesday. (Update: NAB data confirms Australia's business sector remains confident about the future with the NAB Business Confidence Index rising to 6.5 from 4.2 in July).
On Thursday there will be key Unemployment Data, with the Unemployment rate expected to remain at 5.7%, with the economy having added 15k jobs in August.
For sterling it is really all about the Bank of England (BoE) meeting and the release of inflation and employment data.
There will be much speculation as to whether the governor of BoE will increase stimulus measures or not over coming months - further rate cuts and quantitative easing announcements will likely sink Sterling.
Indeed, in his testimony to the House of Commons Select Committee on Thursday the 8th September BoE Governor Carney said that there was still scope to expand stimulus.
However, Carney added that the Current Account deficit, which stands at 7.0% is likely to fall to 4.0% due to Sterling depreciation.
This is an important observation as the UK’s gaping current account deficit is a key vulnerability for Sterling as it suggests a country that imports more than it exports.
This creates a balance between currency inflows and outflows that would normally pressure Sterling lower were it not for the huge sums of currency inflows submitted by foreign investors keen to take advantage of UK investment opportunities.
There are fears Brexit may impact these inflows, thereby removing a key crutch for Sterling. But, as noted, Carney sees the current account deficit coming down on growing exports, thus providing a more stable underpinning for the currency.
The Bank will be wary of implementing any further GBP-negative interest rate cuts or expanding the asset purchase programme should UK data continue to outperform expectations.
The analyst community do not expect the BoE to make any changes next week given how well the UK economy has held up.
“The UK economy is by now holding up better than expected, and that’s why we expect no policy changes from the Bank of England next Thursday,” saiys analyst Holger Sandte at Nordea Bank.
UK Data to Watch
Inflation data out on Tuesday is expected to show prices edging up by 0.7% in August, as a result of the weaker pound pushing up the cost of foreign imported goods. (See here for coverage of GBP's reaction to the data release).
Inflation is forecast to read at 0.7%, a nudge up from the previous month’s 0.6%.
On Wednesday, July Unemployment data in general and Average Earnings in particular, are released.
Earnings are a closely-watched indicator for the BoE as they see it as a major influence on higher future inflation and growth.
The claimant count is forecast to have risen by 1.5K in August, a deterioration on the previous month’s reading when the claimant count actually fell by 8.6K in spite of analyst expectations for a referendum-inspired increase in unemployment.
Average earnings are forecast to have risen by 2.1%.
Thursday sees the release of UK retail sales which are forecast to read at -0.4%, down from the previous month’s surprisingly strong 1.4% rise.
The rise of 1.4% in the previous month was one of the triggers that lead to the British Pound's broad-based rally against its major competitors that lasted through to early September.
Will history repeat itself if the forecast number is beaten?