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Our Pound-to-Australian Dollar Rate Forecast for the Week Ahead

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GBP/AUD is tipped to go higher and possibly reach 1.85, if a recent uptrend extends in the week ahead.

The Pound-to-Australian Dollar exchange rate is rising in an uptrend which our technical studies suggest is likely to continue and take the Aussie Dolalr higher.

If the exchange rate breaks above the 1.8000 February highs we would expect a likely extension up to a target at 1.8500 where the 200-week moving average (MA) is situated.

Large moving averages are levels of dynamic support and resistance where strongly trending prices often stall, pull-back or even reverse trend sometimes.

This is due to the increased buying and selling around them as traders and investors often use them in their decision-making processes.

Alternatively, there is also a possibility that the pair may be in the process of forming a double top reversal pattern at the highs which would be a bearish indicator (outlined in red).

This is far from complete, however, and we would have to see a move down and a break below the 'neckline' of the pattern at 1.7099 for confirmation of a reversal and move lower.

Given the overall trend is up, however, and the double top has not finished forming we are on balance bullish the pair.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

 

Data and Events for the Australian Dollar

The big release for the Australian Dollar in the week ahead are the minutes from the last Reserve Bank of Australia (RBA) rate meeting held on February 6.

The minutes are important because they provide a deeper insight into the thinking processes of the members of RBA rate setting committee who vote on whether to raise or lower interest rates, and interest rates are a major driver of currencies as the higher they are the more inflows of foreign capital they tend to attract.

Whilst on the theme of the RBA, another event in the week ahead is a speech from Reserve Bank of Australia (RBA) deputy governor Bullock, scheduled on Monday at 22.15 GMT, which may provide hints as to when the RBA may be considering lifting or lowering the rate.

Finally, the wage price index is released on Wednesday, February 21, and is forecast to show a 2.2% rise in the fourth quarter compared to a year ago, which would be a rise from the 2.0% in Q3.

Wages are a significant driver of inflation and inflation of interest rates. Higher interest rates tend to drive up the value of currencies because they increase inflows of foreign capital drawn by the promise of higher returns.

Thus a higher wage cost index the more likely inflation will rise and the Australian Dollar with it.

 

Data and Events to Watch for the Pound

The brexit related news will likely be the key driver of any big Sterling moves from a domestic perspective we believe.

"Faced with widespread criticism that the government’s plans for the next phase of Brexit talks are, at best, unclear, PM May and several ministers are set to deliver a series of speeches seeking to clarify the government’s position, demonstrate that the Cabinet is unified and provide some impetus to allow PM May to move forward with transitional phase talks with Brussels," says Victoria Clarke, an economist with Investec.

Clarke says we can expect a more substantial speech from May and other key Brexit ministers, probably following the planned gathering of the Cabinet at Chequers.

"For sterling and UK focused investors more broadly, that speech will be key in shaping sentiment amidst rapidly waning optimism that the UK will be able to reach a transitional arrangement deal over the coming weeks or even months," says Clarke.

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Data-wise, in the week ahead December and January unemployment data is the most significant release for the Pound.

Average earnings (ex-bonuses) for the three months to January are released on Wednesday, February 21, at 9.30 GMT and are forecast to show a 2.4% rise compared to the same 3-month period a year ago; earnings including bonuses are forecast to show a 2.5% rise.

A higher-than-expected result would put upside pressure on the Pound as it would signal to markets that the Bank of England (BOE) is likely to raise interest rates by 0.25% in May, and perhaps even once more before 2018 is out.

Higher wages mean higher inflation as increased consumer demand bids prices in the economy higher, which in turn leads the BOE to raise interest rates. Higher interest rates tend to restrict spending growth as the cost of borrowing goes up but another side effect is a higher Sterling because higher rates tend to attract greater inflows of foreign capital as overseas investors are drawn by the promise of higher returns.

The unemployment rate in December is released at the same time and expected to remain unchanged at 4.3%.

If it drops it will be positive for the Pound as lower unemployment generally leads to higher wages as fewer job-hunters means there is less competition.

"One headwind for U.K. economic growth is that real disposable income growth weakened over the course of 2017," say analysts at Wells Fargo.

"That may be poised to change as the downward trend in the unemployment rate may eventually result in a pickup in disposable income," they continue, adding:

"That is the reason the financial market in the United Kingdom will be paying particularly close attention to the release of the latest unemployment figures on Wednesday of this coming week."

The second estimate of GDP in the last quarter of 2017 is out on Thursday at 9.30 and is forecast to slide to 1.5% compared to a year ago, from the first estimate's 1.7%.

On a quarterly basis, it is forecast to rise 0.5% from 0.4% previously.

If it falls markedly it would be negative for Sterling as lower growth generally lessens the likelihood the BOE will raise interest rates. It also lessens inflows from outside investors who tend to choose to put their money in fast-growing economies.

Business investment is a key gauge of confidence and growth in the economy.

Is is also extremely sensitive to Brexit politics as shown by the chart below, which shows a market slowdown post-referendum, as companies put big projects on ice until after clarification on the UK's new relationship with Europe. 

The level of business investment in Q4 2017 will also be revealed in data out at the same time as GDP and is estimated to show continued growth of 0.5% quarter-on-quarter.

(image courtesy of tradingeconomics.com)

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

 

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