Australian Dollar Tipped to Remain Under Pressure against the Pound this Week

Modified: Tuesday, 16 October 2018 10:52 BST

- GBP/AUD remains in uptrend which is expected to extend

- A break above previous highs will provide confirmation

- Brexit news will guide Sterling, the Aussie will take its cue from employment and Chinese growth stats

The Pound starts the new week softer against the Australian Dollar amidst news of continued deadlock in Brexit negotiations at a time markets were growing increasingly confident that a deal was nigh.

However, key issues remain and it appears a November deadline will now come into play.

Note that Sterling has not suffered any calamitous downside and therefore markets are more-or-less consigned to waiting for November; therefore the GBP/AUD exchange rate could well find technical considerations are increasingly important in lieu of material Brexit headlines.

From a technical perspective, we see Sterling has the pair's dominant partner and gains more likely to come as a result of the uptrend extending, rather than vice-versa.

The two-day fall at the end of last week, occurring as it did in the midst of a strong uptrending phase, indicates a higher probability that Monday will be an up-day rather than a down-day.

We expect the overall trend to then continue edging higher, with a break above the 1.8728 highs confirming a continuation up to the next target at 1.8800.

The 'golden cross' which occurred when the 50-day moving average (MA) crossed above the 200-day MA at the end of September is a very bullish medium-term sign for the pair. The fact the 50-day cut across the 200-day at a shallow angle increases the reliability of the signal.

The pair has broken clearly above all its major MA's, most recently the 200-week MA which was penning the exchange rate into a sideways range with a ceiling in the 1.8340s.

The break above the 200-week is a major indication the pair is in a more established uptrend now and likely to make continued gains. Many investors use major MAs such as the 50 and 200 as rough and ready guides to determine the trend. When prices are above they indicate the asset is in an uptrend and vice-versa for below.

The Pound: What to Watch

Brexit headlines will continue to drive the Pound in the week ahead.

U.K. Brexit minister Dominic Raab will travel to Brussels on Monday for a meeting with E.U. chief negotiator Michel Barnier, probably to agree on the final proposals to put before E.U. leaders at their crunch summit on Wednesday, October 17-18.

The outcome of the summit is expected to be a key driver for the Pound in the week ahead. If there is concrete progress on a withdrawal deal Sterling is likely to surge higher; if, on the other hand, there is no progress the Pound will fall.

Analysts at FX broker XM are rather pessimistic about the possibility of a major breakthrough:

"As it is standard for all E.U. negotiations to last into the last minute, the remaining issues are unlikely to be resolved at the E.U. heads of government summit on October 17-18 and the talks will probably continue into November when a special summit is being planned."

XM adds that "a worst-case scenario would be for Prime Minister May to secure a deal that has little chance of getting approved by the British parliament."

Indeed, weekend headlines have been troubling for the Prime Minister with reports that the cabinet are being urged to stage a mutiny on May's plans.

The big problem lies with a backstop clause that would trigger if the E.U. and U.K. fail to reach a trade deal during the two year transition period. There is talk that the backstop could apply to the whole U.K. and not just Northern Ireland, as had been the original proposal.

It is believed that Prime Minister May is willing to allow this transition to last indefinitely; something fiercely opposed by Brexit supporting MPs in the Conservative party. Should a time limit be agreed the opposition to May might fade and she will be able to push legislation through parliament.

There are several major releases in the week ahead but probably the most important is broad inflation data in September, which is forecast to show a 2.6% rise compared to a year ago and a 0.2% rise compared to a month ago, when it is released on Wednesday at 9.30 B.S.T.

Core inflation, meanwhile, is forecast to show a 2.0% rise compared to a year ago.

Inflation informs central bank policy and, crucially for FX, whether they put up interest rates; these in turn impact on exchange rates. A higher-than-expected rise in inflation would increase pressure on the Bank of England to raise interest rates and support the Pound.

The other major release in the week ahead for the Pound is employment and wage data, out on Tuesday at 9.30.

The unemployment rate is expected to remain at 4.0% in August. Average pay excluding bonuses is expected to have climbed by 2.9%, and pay including bonuses to have increased by 2.6%.

Market participants will be particularly focused on whether pay has increased more than expected - if it has the Pound could rise - as this will raise the outlook for inflation.

The third major release for Sterling in the week ahead is retail sales out at 9.30 on Thursday.

Retail sales have been fairly resilient but in September they are forecast to show a -0.3% drop (from 0.3% in August) but, nevertheless, a 3.7% rise compared to September last year. A higher-than-expected result would probably support the Pound as it suggests greater growth, inflation, and higher interest rates which are usually favourable for a currency.

Finally the weekends with a speech by the governor of the Bank of England (BOE) Mark Carney on Friday, at 16.30, which has been earmarked by some as a possible time for the Uk authorities to announce progress on securing trade deal with the EU.

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The Australian Dollar: What to Watch

The main event for the Australian Dollar in the week ahead is probably either the release of the Reserve Bank of Australia's (RBA's) meeting minutes on Tuesday, October 14 at 1.30 B.S.T, or employment data out at the same time on Thursday.

The RBA's neutral stance is limiting upside potential for the Aussie and the minutes will be scrutinised for signs of a bias. Consensus expectations are still slanted towards expecting higher rates due to strong domestic data. Higher rates would be beneficial for the Aussie as they attract capital inflows as well as reducing outflows.

Another key release is employment data, which is traditionally one of Australia's strong points and generally, the reason rate hikes have been kept alive.

The unemployment rate is forecast to remain at 5.3% and total jobs to have increased by 15.3k in September, from 44k in August. The type not just the number of new jobs will be key, with full-time jobs preferred as they are a stronger sign of economic health.

"In Australia, where economic growth has been stronger and a rate hike a bigger possibility, employment numbers on Thursday could provide the Aussie a lift if there are further jobs gains in September. Employment is forecast to have risen by 15k last month, with the unemployment rate anticipated to hold at 5.3%. Also of interest for Aussie traders will be the minutes of the Reserve Bank of Australia’s October policy meeting on Tuesday," says broker XM.com in a note detailing expectations for the coming week.

China is Australia's largest trading partner and it is a major importer of Australian goods, especially commodities. Chinese GDP data, out on Friday, will be the first major GDP print for Q3 and is expected to be an important event for global financial markets.

The Chinese economy is expected to show growth of 6.6% in Q3 compared to Q3 in the previous year and 1.6% compared to the previous quarter. This compares to previous rates of 6.7% and 1.8% respectively. Whilst these still represent comparatively lively growth rates a deeper-than-forecast slowdown could be negative for the Australian Dollar.

Chinese GDP is released at 3.00 on Friday, October 19.