The Pound-to-Australian Dollar exchange rate's charts are showing potentially bullish signs while employment and wage data out of both Australia and the UK will form the data highlights for this exchange rate in the coming week.
Technical studies of the GBP/AUD exchange rate chart show several indicators that advocate for further rises, however we would first want to see the exchange rate rise clearly above the previous 1.7370 highs, for confirmation.
Technical analysis is the study of the structure of an exchange rate's underlying market via price charts, and it can sometimes yield interesting insights into the possible future direction of the exchange rate.
Taking the 'chunk' of price action from the August lows we see the possible outline of an ABCD pattern, which is composed of three waves and looks a bit like a flash of lightning or zig-zag:
The rules governing ABCD patterns are that waves A-B and C-D should be roughly equal, and for this to be the case on the potential ABCD pattern on GBP/AUD the exchange would need to extend higher to a target at around 1.8000 because C-D is too short at the moment.
We are more conservative than the target suggested by the pattern, and see a break above the 1.7370 highs leading to a move up to a target at 1.7500, which is an important round number and therefore may attract increased attention from traders who may take profit at that level, increasing supply and dampening the exchange rate's progress higher.
Other bullish factors on the chart include the fact the exchange rate is now above a major multi-month trendline and the 50 and 200 day moving averages.
One bearish offsetting factor, however, is the flat MACD momentum (circled) in the panel below the chart.
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Data and Events to Watch for the Australian Dollar
The key releases in the week ahead for the Australian Dollar will by employment and wage data, both of which have the potential to move the currency.
Wage data is out at 00.30 GMT on Wednesday, November 15, and is forecast to show a mild 0.5% rise in Q3 - the same as Q2.
Employment Data, meanwhile, is out at 00.30 GMT on Thursday and is forecast to show a 15k rise in jobs and a rate of 5.6% from 5.5% previously.
Australian employment has been a bright spot in the economy and some analysts expect another strong employment report on Thursday.
"We expect another outsized employment report as Oct and Nov tend to be seasonally robust employment months and we assume a similar impact this year, looking for +30k for both months. This leaves annual growth close to 3% and keeps the rate at 5.5% (if the participation rate ticks up as we expect to 65.3%)," say analysts at TD Securities in a note to clients previewing the data.
TD Securities also think there is the possibility of a higher-than-expected rise in wages, and if they are right then the Australian Dollar will probably rise.
Although Australia boasts high levels of unemployment inflation has remained stubbornly low because wages have stayed relatively low despite the tightening labour market.
Low inflation has stopped the central bank from raising interest rates and interest rates influence the exchange rate.
When interest rates rise so does the currency and vice versa for when they fall, as such wage data could be key when it comes to the Aussie in the week ahead.
Events and Data to Watch for the British Pound
Political factors will remain a key focus in the coming week.
They will probably revolve around two major issues: the first is the survival of the Prime Minister and the second the passage of the 'withdrawing bill' through parliament, which is the piece of legislation which will take the UK out of the EU.
The latest reports suggest that the number of rebel Tory MP's who want Theresa May to quit the party leadership has grown to 40 which is only 8 short of the number needed to trigger a leadership challenge.
If a mutiny emerges in the week ahead, it will destabilise the political and economic outlook and likely weigh heavily on the Pound - the Pound dislikes uncertainty and questions over the UK's political direction would weigh heavily, particularly as the prospect of an anti-market Labour party Government taking power becomes more likely.
Instability in the UK Government also of course has impacts on the UK's ability to negotiate on Brexit which remains critical to the Pound's outlook.
A change of leadership in the Conservative party would surely delay Brexit negotiations, while another general election would certaintly knock months of the timeline.
The other great issue is the 'withdrawal bill' which passes through Parliament this week. MP's will be debating final amendments to the bill - which provides the domestic legislation required to take the UK out of th EU - in the coming week.
One major point of contention is whether the bill should be changed to allow MP's a vote on the final Brexit deal negotiated with the EU. A number of Conservative MPs are expected to vote with Labour to force through changes to the bill, or at the very least block passage of the bill.
If this is indeed the case then the Government's fragile majority in the Houses of Parliament will be exposed, once again drawing questions over the Government's longevity and adding another layer of uncertainty that could weigh on Sterling.
"In the absence of material positive economic data, GBP will not head higher because of Brexit‑related uncertainty. The EU and UK are struggling to reach a timely compromise on the divorce bill, the status of the border between Northern Ireland and EU member Ireland and the future of EU/British citizens living abroad,” says Elias Haddad, an analyst with Commonwealth Bank of Australia.
Hard Data to Watch
The main release in the coming week is inflation data on Tuesday, November 14, at 09.30 GMT, with October expected to see a rise of 3.1% compared to a year ago, which would represent a rise of 0.1% from the previous 3.0% result and see inflation hitting a new 2017 peak.
Such a rise in inflation would probably be marginally supportive of the Pound as it would increase in the chance the Bank of England (BOE) will raise interest rates again, perhaps even sooner than previously expected.
Nevertheless, the BOE themselves have forecast inflation peaking at 3.1% in October - but then rolling over - so it would take a sustained rise for several months to really support the Pound - or a shock rise in October of over the 3.1% expectation.
Higher interest rates strengthen currencies because they attract more inflows of foreign capital from global investors drawn by the promise of higher interest returns - and vice-versa with lower interest rates.
Central banks control the base interest rate which all other banks use to set their interest rates.
When inflation is too high central banks raise interest rates to bring prices back down by encouraging saving over spending and discouraging borrowing by making it more expensive.
Another major release for the Pound over the next five days is employment data on Wednesday at 9.30 GMT.
The main focus will not be on the Unemployment rate, however, unless it is widely divergent from estimates, but rather on wage data.
This is because earnings are directly linked to inflation with a pick up in the former leading to a rise in the later.
Therefore a strong pick-up in earnings (Ex-bonus) which were 2.2% previously and are expected to moderate down to 2.1% would help Sterling, and vice-versa for a fall.
The final major release of the Pound is Retail Sales data on Thursday at 9.30.
On a monthly basis Retail Sales both Core is expected to rise from very depressed readings in September of -0.7% and -0.8% respectively, rising to 0.1% for both.
Compared to October last year, however - ie year-on-year - they are forecast to show a -0.4% fall for Core and -0.7% for headline compared to 1.6% and 1.2% respectively in October 2016.
The data is significant for the Pound because a further contraction in Retail Sales will increase concerns about growth and mean it is less likely the BOE will put up interest rates, resulting in weakness for Sterling.