GBP/AUD has run into a tough area of resistance on the charts which suggests the Pound's rally higher could struggle over coming days. Much will depend on Brexit negotiations and a data dump out of Australia on Thursday.
The Pound-to-Australian Dollar exchange rate is quoted at 1.7505 at the start of the new week, near the top of the September-November range. Indeed, our technical studies confirm the pair to be in a short-term uptrend, but it has now reached at a tough long-term barrier.
The barrier in question is the significant chart level at 1.76, which has resisted the exchange rate several times before (circled), first in September 2016 and then in May 2017:
The question is obviously whether this time things will be different and the exchange rate will successfully break above the resistance zone and continue its uptrend.
If the pair managed to break above the resistance zone, confirmed by a move above say 1.7800, that would indicate it was probably moving higher and the uptrend was more entrenched.
We forecast such a move to initially extend to 1.80 where we would expect buyers to take profit and close their positions, increasing demand and causing a temporary pull-back.
The overextended chart and level of tough resistance just above in the 1.76-1.77s coincides with speculation that the Australian Dollar may be bottoming against the US Dollar - often moves in the AUD/USD exchange rate can explain moves in GBP/AUD.
"Having fallen more than 7% over the past 2 months, the Australian Dollar has found a bottom," says BK Asset Management Managing Director Kathy Lien. "The sell-off in AUD/USD stopped right at the 100-week simple moving average just as gold, iron ore and copper prices turned higher."
So it is worth keeping an eye on the headline AUD/USD over coming days; a break lower would naturally aid Stering.
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Data and Events for the Australian Dollar
The Australian Dollar appears to have found support following comments from the governor of the Reserve Bank of Australia who said he expected the next move in interest rates to be up not down.
Higher interest rates tend to be supportive of currencies as they attract more inbound capital from investors seeking higher returns on their money; Australia's high interest rate has for a long time held up the value of AUD.
But Lien cautions buyers not to get too excited as Governor Lowe made it clear he didn't expect a rate hike soon.
"The RBA remains firmly neutral as Lowe sees no strong case for near-term adjustment in policy," she says.
Inflation and weak wage growth are still a big issue for the RBA despite the recent upturn in the economy.
"He's still worried about low inflation but encouraged that wage growth appears to have stabilized," says Lien. With regards to future moves at the RBA, the tenor of upcoming data will be important.
On the hard-data front, Thursday, November 30, sees a massive data dump for the Aussie, with New Home Sales, Private Sector Credit, Building Permits and Capital expenditure in focus.
New home sales fell 6.1% in the previous month and an improvement will be looked for, building permits are forecast by economists to have fallen back 0.9% in October; a beat on this number could aid the Aussie Dollar.
Economists are meanwhile forecasting a 1.1% rise in Private New Capital Expenditure and a 0.4% gain in Private Sector Credit; again a beat on expectation could help.
Also keep an eye on iron ore prices, the commodity is Australia's top export and the recent fall in iron ore prices has coincided with the Aussie Dollar's recent soft patch.
"AUD/USD has scope to edge a bit higher this week on a weaker USD and firmer iron ore prices. Improving global economic activity and a positive China November manufacturing PMI," says Elias Hadad at Commonwealth Bank Australia.
Data and Events to Watch for the Pound
Whether the Pound can ultimately break higher against the Euro will depend on progress over Brexit negotiations; it appears this issue will increasingly dominate sentiment on Sterling into year-end with a key EU summit on the matter in mid-December being a highlight.
It is at this summit that EU leaders will decide whether or not to greenlight or redlight the progression of negotiations onto the all-important issue of trade and the future relationship.
Businesses and Sterling will need this process to begin as soon as possible.
Much like the many-headed Hydra, a mythical creature that Hercules fought, which regrew two new heads for every one he cut off, so the Brexit negotiations keep growing new problems for Prime Minister Theresa May just as she has seemingly dealt with one.
Just after appearing to agree on a divorce bill that will help propel Brexit negotiations onto the issue of trade, a new problem has presented itself in the form of the border between Northern Ireland and the Republic of Ireland.
Irish Prime Minister Leo Varadka has threatened to veto any EU agreement to progress Brexit negotiations if he feels progress on the Irish border is inadequate; this is quite an interesting stance considering such a veto could push the EU and UK to a hard-
Brexit and no European country has more to lose on a hard-Brexit than Ireland considering the UK is easily their largest trading partner.
A senior Irish diplomat in the EU has said it would really be better all round if the UK remained in the trade and customs union - or at least the customs union as then there would be no border issue.
He warned the UK people not to put too much faith in future free trade agreements as even the best of these, would "fall far short of being in the single market."
One solution would be to essentially keep Northern Ireland in the EU (exempting it from Brexit) so that the border could be left open, however, this idea has been met with firm resistance from the DUP, Theresa May's partners in government, and her only key to a parliamentary majority.
With no clear solution, the Irish border issue is now likely to further delay the onset of the next stage of Brexit talks, and Theresa May has only got until December 4 to come up with a solution.
Clearly, how the Ireland issue evolves in the coming week, will probable be a factor impacting on Sterling with any substantial break-down suggesting the Brexit process will be slowed down.
"The bigger hurdle to clear in order to reach “sufficient progress” is agreement on the Irish Border. The Irish Government’s position is that an “electronic border” is not viable. As a result, it won’t settle for anything less than a UK commitment to regulatory equivalence between Northern Ireland and the Republic in line with EU standards," says Andrew Wishart, UK Economist with Capital Economics.
Wishart notes the UK’s current intention is to leave the Single Market and the Customs Union and regulatory equivalence across the Irish border would require a customs border between Northern Ireland and the rest of the UK, which David Davis has ruled out.
But Mr. Barnier pointed out in a speech on Monday that contrary to arguments this would come at the cost of the integrity of the UK single market, many rules in Northern Ireland already differ from that in the rest of the UK.
From a hard-data perspective, the main release in the coming week will be Manufacturing PMI on Friday, December 1, at 9.00 GMT, which is forecast to show an uptick to 56.5 from 56.3 previously.
Investment bank TD Securities expect the result to be even higher as Eurozone growth spills-over into the UK:
"While strength in its euro-area counterparts is being driven by broad-based growth there, spillovers to UK businesses should nevertheless give the measure a lift, and November's CBI indicators seem to suggest continued healthy growth by firms," they said in a week ahead round robin.