The Australian Dollar may rise if the RBA gives the economy a thumbs up at its latest meeting while, for Sterling, the charts are already waving red flags.
The GBP/AUD pair continues to rise in an ascending channel, illustrated on the weekly chart below, however recent weakness has opened the door to a fall within the channel rather than a rise.
Above: GBP/AUD shown at weekly intervals.
On the daily chart, the string of down days during the previous week has brought the exchange rate to the trendline drawn from September’s lows.
Above: GBP/AUD shown at daily intervals.
Prices tend to bounce off trend lines rather than break right through them and this can attract technical traders who may bet on a bounce higher.
The increased demand from traders buying around this level actually helps to provide the bounce with momentum so that the expectations become a self-fulfilling prophecy.
The question now for technical analysts is whether the exchange rate is likely to break below the trendline or to bounce higher into a full recovery.
We are marginally biased to calling a break lower, which would be confirmed by a move below 1.7350, toward a target of 1.7000.
This target is based on the principle that a break below a trendline tends to extend the same distance as the move prior to the break. The line between points ‘A’ and ‘B’ highlight this anticipated move on the chart below.
If the downward move extends the full distance of the prior slide before the break then this would take the exchange rate down to 1.6800.
However, the 1.7000 is such a significant level it will be tough to break so we have chosen that as a more conservative target.
Data and Events for the Australian Dollar
The main release for the Australian Dollar this week is the latest Reserve Bank of Australia (RBA) meeting minutes.
This is important because it contains a summary of the deliberations among the RBA board as they vote on where to set the Australian cash rate.
The cash rate is important for the currency because it influences foreign investors’ demand for Aussie Dollars, who are drawn to jurisdictions that offer higher rates of return.
Interest rates are dictated by inflation. If inflation is above its target then the RBA will raise interest rates to bring it down. If inflation is below target then the RBA may lower its interest rate to spur growth and inflation.
Last week's strong Australian labour market data reinforced an increasingly optimistic outlook for the economy, which is starting to see inflation expectations turn higher.
If this improved outlook, which is also based on continued economic stability in China, is reinforced by the contents of the minutes it will probably lead to a rise in the Australian Dollar. The minutes are out at 00.30 GMT on Tuesday, December 19.
"Looking ahead, the minutes from the most recent RBA meeting is the only piece of data worth watching next week from Australia and given the latest jobs report and pickup in Chinese demand, the RBA should have some good things to say about jobs and maybe even the economy," remarked Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.
Data and Events for the Pound
Front and centre in the week ahead for the Pound will be Brexit politics, with the cabinet set to discuss goals for phase two of talks in a key meeting requiring ministers to define the “end state” relationship the UK will pursue with Europe
"With a cabinet reshuffle imminent some may sound more conciliatory," says Canadian investment bank TD Securities in its weekly outlook.
Wednesday the UK parliament will vote on a further amendment to the Brexit bill, which is expected to put a firm departure date into legislation.
However, analysts are sceptical the government will get enough votes to push this through as opposition to the idea is pretty strong.
Rebels may be emboldened by their successful defeat of the government last week which, having passed “Amendment 7”, requires parliament to be given a “meaningful vote” on whether to accept the final Brexit agreement struck with Brussels.
From an economic data perspective, the main events are current account and business investment data, due out on Friday at 9.30 GMT, both of which are indicators that are peculiarly sensitive to Brexit and can impact the Pound.
The current account measures the difference between money flowing into and out of the UK. It most recently showed a deficit of £-23.2 bn.
Economists forecast this figure to fall to £-21.3 bn for the third-quarter. If the actual number falls even further then it may lift the Pound as it will show the deficit is narrowing faster than expected.
Business investment is expected to rise 0.2% for the third quarter, the same as it did in the previous three months. A greater increase would be positive for Sterling as it would suggest businesses are not holding back new projects as much as has been feared. Brexit uncertainty has been a key influence on business investment of late.
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