Pound Sterling is under pressure against the Australian Dollar at the start of the new week as Brexit concerns are revived over the weekend.
Traders are betting that the UK is almost certain to exit the European Union's single market following comments made by Prime Minister Theresa May over the weekend.
The Pound to Australian Dollar exchange rate slipped from the week's opening level at 1.6840 to 1.6650 as markets digested Prime Minister Theresa May's much-watched weekend interview in which she confirmed her Government would be looking to take back control of the UK's borders once the country exits Europe.
May gave no new details away but it appears control over immigration is a red line - as she heeds the message delivered by the UK electorate in June's Brexit vote.
This suggests the Government is willing to forfeit membership of the single market; access of which requires the free movement of European citizens.
According to economists, exiting the single market leaves the UK open to a longer-term economic growth rate that is below potential. Of course the economists could well be wrong - the UK could do well outside of Europe should other trade deals be struck and should independent law-making create a more business-friendly environment.
However, for now, the bet is that growth will be lower, and therefore the Pound is seen struggling.
"Independent GBP weakness is the main theme overnight. GBP/USD is just below 1.22 and EUR/GBP above 0.86 after PM May said in a weekend interview that she was not interested in “keeping bits of [EU] membership,” a comment widely interpreted as indicating that the UK will leave the single market when it leaves the EU," says Adam Cole, an analyst with RBC Capital Markets.
May has said she will be delivering further details over coming weeks - and this is the prime risk to Sterling we believe.
Those with foreign exchange payments are looking at a GBP-AUD exchange rate that ranges between 1.6058 at the banks towards the late 1.64s offered by independent specialists who are more competitive on the spreads they offer.
Concerning the technical outlook, GBP/AUD is in a sideways range within a short-term uptrend.
Recently is has fallen to the bottom of the range in the 1.68s.
It has found support both from the range floor and the 50-day moving average (MA).
These are likely to present formidable obstacles to further downside.
Even if the exchange rate breaks below the recent lows and the MA, it does not have far to fall before it encounters a support barrier in the form of the S2 monthly pivot.
The black box with red hatching on the chart highlight the area around these levels as a support ‘zone’.
This zone is quite strong and so bearish progress may be difficult.
Instead, there is a chance of more upside and a breakout from the range highs at 1.7215 are likely to see a continuation higher to a target at 1.7275 where a resistance barrier is situated in the form of the R1 monthly pivot.
Data: Aussie Retail Sales in Focus
The big current debate around the Aussie Dollar centres on whether the Reserve Bank of Australia (RBA) will decide to lower interest rates at their February meeting or not.
The third quarter was unexpectedly slow for the economy and many think the RBA might wish to support growth by lowering interest rates.
Whilst this might spur borrowing it will weaken the Aussie Dollar
Bar unexpected commentary from RBA officials this week (there is none scheduled), we do not see any data presenting a material risk of challenging current views on policy.
Retail Sales on Tuesday, January 8 at 00.30, is likely to be the most important in a rather quiet week.
ING’s Chris Turner expects Retail Sales in November to reinforce the current negative view of the economy by coming out below expectations.
The Australian housing market is seen at risk of decline after peaking in recent years, so any housing data is of interest.
In the coming week, this means Building Approvals at 00.30 on Monday morning (9 Jan).
Data, Events for the Pound in the Week Ahead
Of importance will be Bank of England (BOE) governor Mark Carney’s testimony at the Treasury select committee on Wednesday, Jan 11 at 14.15.
There is a risk Carney may use the opportunity to give markets a ‘head’s up’ of an imminent rate cut according to ING bank’s Chris Turner.
Any such commentary could heavily weigh on Sterling.
Wednesday also sees the release of Manufacturing Production at 09.30 which is expected to show a rise of 0.5% from a minus figure previously.
Industrial Production, out at the same time, is expected to show a robust rebound of 0.7% from -1.3% previously.
The Trade Balance, also out at the same time, is expected to show the deficit widen to -11.4bn in November.