Pound-to-Australian Dollar: Technical Forecasts and Events to Watch in the Coming Week

Our technical studies suggest the Pound is likely to extend its uptrend against the Australian Dollar in the near-term but we will be watching the outcome of the latest EU-UK Brexit negotiations for guidance.

The Pound-to-Australian Dollar exchange rate retreated from fresh highs at the end of last week having risen strongly since the late August lows and has reached the point where it almost touched a major trendline at the 1.7171 highs.

The trendline is likely to prove a hard level to break above but given the entrenched short-term uptrend our expectation is that bulls will make an attempt to break above it, once the pull-back on Friday is absorbed.

Nevertheless, the pair is at something of a cross-roads technically and the forecast subject to much uncertainty since it is also possible the pair could also be completely repulsed by the trendline and pull-back even lower.

For confirmation of a continuation higher and a clear break of the trendline, therefore, we would need to see a break above the 1.7245 level, which we could then expect to target 1.7440.

This target is based on the height of the wave just prior to the break extrapolated higher after the break. 

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Events and Data to Watch for the Australian Dollar

The Aussie fell midweek after comments from Governor Lowe said the Reserve Bank of Australia was in no hurry to raise interest rates, or of following the main pack of G10 central banks in their perceived tightening cycle upswing.

A further weight on the currency was China’s credit rating downgrade since they are major trading partners.

In the week ahead there is an absence of major data releases and of more import could be commentary from RBA deputy Governor Guy Debelle and board member Michele Bullock.

Debelle speaks on Thursday, September 28 and is the headline risk for the Aussie - markets will be looking for the deputy Governor to double down on Lowe's assertion that no interest rate rises are imminent.

This would further undermine AUD we believe.

However, some commentators believe the RBA risks being too negative and reckon they will have to raise interest rates sooner than they are currently communicating.

ANZ Bank’s David Plank, for example, thinks the RBA will raise rates twice in 2018 in order to stem the flow of cheap lending which has made Australians some of the most indebted people in the world.

If the RBA start to share this view, we would imagine the Aussie Dollar will find some support. But this week might be too early to expect any shifts.

Events and Data for the Pound

The fourth round of EU-UK Brexit negotiations commence on Monday, September 25.

The talks follow Prime Minister May’s Florence speech, with its 2-year transition and chief EU negotiator Michel Barnier’s moderately positive reaction to the speech, seems to be biased to supporting rather than undermining Sterling.

Negotiators are set to brief the press on the outcome of this round of talks on Thursday and the key for currency markets will be whether Barnier indicates he believes progress is being made.

The worst possible outcome for Sterling would be a disruptive Brexit - where negotiations fail to deliver a credible trading relationship between the EU and UK when the UK exits the Union in March 2019.

The first round of talks that see legacy issues and the practicalities of the exit dealt with must be cleared before talk of the trading relationship begins.

Also ahead, speeches by Bank Of England’s Mark Carney on Thursday and Ben Broadbent on Friday could provide potential focal points for Sterling traders.

The current market view is that the BOE is embarking on a tightening cycle with analysts now even pencilling in the likelihood of a November rate hike; and the speeches need to be read in light of that more hawkish backdrop.

Markets presently assign an 80% chance of a November rate rise.

Clearly an increase in hawkishness via stronger confirmation of a November rate move by either speechmaker would lead to fresh gains for the Pound, which is positively correlated to interest rates.

Data-wise, the next most significant release could be the Current Account for Q2, at 9.30 BST on Wednesday, September 27, which is forecast to show a slight reduction in the deficit to -15.8bn from -16bn in Q1.

A deeper contraction could help the Pound.

At the same time as the Current Account data is released Business Investment data will also be released for Q2 and will offer a further insight into the strength and resilience of the economy.