Traders will be carefully monitoring the charts of the Pound-to-Australian Dollar exchange rate this week as the market has reached a level of considerable importance.
GBP/AUD starts the new week and month on a relatively stable footing at 1.7095 having enjoyed a notable rally through the course of September; recall the exchange rate was as low as 1.6237 at the start of the month.
Gains however faded in late September and the market appears at a key juncture at the start of the new month.
From a technical perspective, the Pound remains in a short-term uptrend against the Australian Dollar but appears to have reached a major level of resistance at 1.7150 where it has met a descending long-term trendline.
The trendline will present a tough obstacle to the exchange rate which will struggle to break above it.
The short-term uptrend is still intact, however, and we expect it to continue rising, with a break above the 1.7183 highs leading to a continuation higher, to a target at 1.7300.
This target is calculated by taking the height of the move immediately prior to the trendline (a) and extrapolating it from the point of the break above the trendline (b).
Looking at other technical indicators, the MACD is gently rolling over and this does not look very bullish.
This could possibly signal a period of sideways market consolidation, although the MACD alone is no usually enough to use for forecasting purposes on its own.
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Data and Events for the Australian Dollar
Seasonality is an important factor to watch as the Australian Dollar has an history of performing well in October with currency strategists at ANZ saying they are positioning for the Aussie to gain against a number of rivals as a result.
“With markets slowly pricing in a tightening by the Reserve Bank of Australia, the AUD could be set to repeat its seasonal outperformance this October,” says Khoon Goh at ANZ.
Indeed, the main event for the Australian Dollar on the domestic calendar in the coming week is the meeting of the RBA on Tuesday, October 3, at 04.30 BST.
The market is not expecting the RBA to change rates until 2018 at the earliest, so it is highly unlikely there will be any changes this Tuesday.
A similar assessment to that of the previous meeting is expected.
"We expect a control-C / control-V statement from September as to not draw unnecessary attention," say Canadian investment bank TD Securities, adding, "We do not look for a hawkish tilt from Governor Lowe until February 2018 at the absolute earliest."
So with markets adopting a sanguine approach heading into the event, any surprises have the potential to move the currency.
The data calendar is relatively low-key with retail sales and trade figures dominating.
Trade balance data due on Thursday at 01.30 should show a surplus of $0.9bn in August after data showed the volume of iron ore exported increased, and a higher-than-expected result will support the AUD.
Retail trade data also out on October 5 is forecast to show growth of 0.3%.
"The August retail report shapes up as a particularly important one for gauging the consumer. Retail sales have stalled through June-July suggesting the Q2 rebound from a weather affected Q1 has faded quickly and that 'underlying' conditions remain weak. The August update will give a clearer indication of just how weak," say Westpac Bank in a briefing to clients ahead of the new week.
Events and Data for the Pound
The main releases for the Pound in the week ahead will be September Purchasing Manager Survey data which will give us insights into the health of the manufacturing, constructing and service sectors for the month of September.
"Next week’s PMI reports will be exceptionally important. If manufacturing, service and construction activity accelerates, it would validate the BoE’s calls for tightening and reinvigorate the rise in Pound Sterling. However, if manufacturing- and/or service-sector activity slows, it would cast doubt on the central bank’s plans and cause the currency to give up some of the gains that it enjoyed in September against the dollar and the euro," says BK Asset Management's, Managing Director, Kathy Lien.
The first release is Manufacturing PMI on Monday at 9.30 BST, which is forecast to show a slowdown to 56.4 from 56.9 in the previous month of August.
Construction PMI is out at the same time on Tuesday and is forecast to show a slowdown to 50.8 from 51.1.
Finally, Services PMI is out at 9.30 on Wednesday and is forecast to remain unchanged at 53.2.
Politics will also be in focus with the Conservative party conference taking place in the first-half of the week.
However, it will be Prime Minister Theresa May's speech on Wednesday that has the most market-moving potential as she is expected to touch on the issue of Brexit.
May's speech on the issue of Brexit delivered in Florence on September 22 was widely credited with giving Brexit negotiations a fresh impetus with the outcome of the fourth round of negotiations showing fresh progress.
However, there is still much progress to be done and markets will be interesting if May is willing to deliver further clarity.
Furthermore, there are concerns May's position is in jeopardy with persistent talk of senior figures within the Conservative party willing to challenge her for leadership of the party.
“We think the risk/reward of being long GBP is not attractive and prefer selling into rallies,” says Hans Redeker at Morgan Stanley. “The Conservative Party Conference in the coming week (begins at weekend) also poses a risk event, where signs of a split within the Tory Party may weigh on GBP as it raises concerns about PM May's leadership.”
It goes without saying that any successful challenge opens up the door to fresh uncertainty. If a new Prime Minister were to be installed over coming weeks or months the pressure for another general election mounts.
If there is one thing the Pound detests, it is is uncertainty.
"The UK’s Conservative Party Conference introduces downside risks for GBP. While attempts to extend the status-quo relationship to the transition period seemed to bode well for the currency, the Conference could provide a chance for a reassessment of the relative strengths of the leadership members, adding headline risks," say Barclays in a week-ahead note to clients.