* Australian employment data beats expectations
* Technical studies project an extension lower in the Pound to Australian Dollar exchange rate.
* GBP/AUD seen at 1.6914 at time of writing
The Australian Dollar trades higher into the back-end of the week thanks to the release of some compelling labour market statistics.
The Employment Change for November shows an increase in employment of 39.1K jobs, well ahead of the 20K forecast by economists.
Furtheremore, the previous release was revised higher to reflect an increase in employment of 15.2K.
"Today’s labour force data would provide the RBA with some comfort that there is reasonable momentum in the economy. While the unemployment rate edged higher in November, employment bounced back. Broadly, momentum has slowed, but we expect the unemployment rate to slowly trend lower over the year ahead. We continue to see the RBA on hold with an easing bias," says Jo Masters at ANZ Reearch.
The Australian Dollar is stronger across the board thanks to the data with gains coming against the Euro, US Dollar and Pound Sterling.
From a technical perspective, GBP/AUD is forecast to continue falling after breaking below a key trendline.
Following a few days of indecision, the exchange rate looks set to follow-through to the downside.
A break below 1.6775 would provide confirmation of such an extension lower.
When prices break below a trendline they tend to travel the same distance as the move immediately prior to the break, labelled ‘x’ in the chart below.
In this case, such a method for generating a target would lead to a move down to 1.6605.
This also happens to be just above a double layer of support composed of the monthly pivot (PP) and the late November lows.
According to Aussie lender Westpac’s predictive valuation model, the outlook for the currency is “Neutral”.
On Tuesday, the Aussie eased after the release of the Westpac Consumer Sentiment Survey, which showed confidence dropping -3.6% in December, nevertheless the currency has reasserted itself against the pound on Wednesday.
Looking ahead, of significance is the Bank of England (BOE) rate meeting on Thursday 15.
Whilst no-one is expecting a rise in interest rates it is what is held in the minutes, published right after the meeting which will be of primary interest not the policy decision.
Bank of America Merrill Lynch’s (BOFAML’s) Rhys Evans expects the BOE to raise rates in August now rather than February as he previously believed.
Whilst recent data has been positive, Rhys Evans views the resilient GDP forecasts as resulting from the spill-over of “base effects” from earlier in 2016.
The threat of inflation is also still extant according to Evans:
“The monetary stimulus in the system has been fading.
“True, GDP forecasts have been improving and real gilt rates remain lower than May.
“But, the former is mainly due to base effects from 2016 rather than the outlook while longer-term household real rates have fallen little.
“We look for another rate cut to 10bp in August rather than our previous call of February."
If correct, the markets will have to price another rate cut by selling Pound Sterling which suggests longer-term pressures remain with the GBP/AUD pairing.