The Australian Dollar remains biased towards further softness against the Pound into year-end we believe.
Studies show that the GBP/AUD pair broke temporarily below a trendline but then quickly recovered and is now approaching the level of its former highs at 1.7178.
We continue to expect higher exchange rates despite a lack of upside momentum, in the absence of clearer bearish signs.
A break above the 1.7178 highs would reconfirm a continuation higher to a target at 1.7320, at the R1 monthly pivot, a level traders watch as it often acts as an obstacle to price.
The one proviso to our bullish forecast is the MACD momentum indicator (circled in red), which looks like it might be topping out and therefore about to fall, signalling weakness in the underlying asset too, however, it is too early to say for sure.
From a fundamental perspective, the UK economy is growing more quickly than the Australian economy, despite the mid-year Brexit vote.
Growth in the third quarter in Australia was shockingly disappointing, coming out as it did in negative territory at -0.5%, whilst in the UK it remained at 0.5% - a full 1.0% higher.
UK Q3 GDP final estimates will be published on Friday and if they remain at 0.5% this may add a boost to the Pound; if not the Aussie may recover some ground although a generally bleak outlook may well keep gains capped.
Australia narrowly avoided a credit downgrade in the past week, according to CIBC’s Economist Royce Mendes, in Toronto:
“The country narrowly avoided a rating’s downgrade this past week, but the government’s worsening fiscal position could continue to see the AAA rating questioned for some time.
“While that’s not a core concern for the economy, a downgrade could have a greater economic impact if it feeds through to credit downgrades for the banks, increasing funding costs and passing through to raising rates for already heavily indebted households.
“While we aren’t forecasting that to happen, it remains a risk that will cap any appreciation in AUD.”
Many investors are sceptical about the fundamental underpinnings behind the current commodity rally which has been supporting the Aussie.
According to advisory service Capital Economics, the rally in industrial metals appears to be mainly due to speculation rather than demand so it is questionable whether the Aussie will continue taking support from that source of strength.