Pound-to-Australian-Dollar Rate in the Week Ahead: Relief Could soon be at Hand

© Greg Brave, Adobe Stock

- Sterling could find relief at major support zone.

- Major trend breakdown could now be in the making.

- GBP eyes Brexit saga, AUD looks to US-China tensions.

The GBP/AUD rate has been falling within a steep downtrend ever since peaking at the 1.87 October highs but the pair is now approaching a major area of support, where it could steady.

The fundamental catalysts for the decline are recovery in the Australian Dollar and a sharp fall in the value of the Pound due to an increase in concerns over the likely outcome of the Brexit negotiations. 

GBP/AUD is expected to continue its downtrend to at least as far as the next major support area around the 1.7550 level, which coincides with the lower trendline of the rising channel the pair has been in since the late 2016 lows.

Above: Pound-to-Aussie rate shown at weekly intervals.

Yet the decline in the market may not stop at the trendline. There is also a possibility of a break below the trendline that could pave the way for further declines, to 1.70 and potentially even the 1.6750 threshold.

Only one thing prevents us from thinking the trendline will break and that is the Relative-Strength-Index momentum study in the bottom panel, showing the pair entering the oversold zone, which indicates an increased chance of the sell-off stalling soon. 

We think there is a good chance the pair will fall to the trendline and find temporary support, before bouncing higher. Any bounce will probably peter out quite quickly however, as the short-term trend is still downward. 

A break below the 1.7500 level of the August lows would provide confirmation of a breakout below the channel.

 Above: Pound-to-Aussie rate shown at weekly intervals.

The pair has broken below both the 50 and 200-day moving averages (MA), which is another bearish indication for the outlook.

Many investors use MAs to make buying and selling decisions, according to whether the price is above or below the average. A break below is a negative signal to sell.

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The Australian Dollar: What to Watch

The Australian Dollar has been rising due to signs of an easing in China-U.S. trade tensions, after reports suggested leaders of the two countries will meet for private talks at the G20 meeting due to take place at the end of November.

However, fresh reports from over the weekend indicated frosty exchanges between the two superpowers at the recent Asian Pacific Cooperation Summit (APEC).

“The two big giants in the room could not agree,” says Peter O'Niell, Prime Minister of Papua New Guinea.

If it looks like trade talks are breaking down again and the U.S. revives threats to increase the scope or level of tariffs on imports from China, the Aussie could easily lose its upward momentum in the week ahead.

China is Australia's biggest trading partner so the state of the Chinese economy is important for sentiment toward the Aussie Dollar. As a result, increased U.S. duties on Chinese goods wouldn't just hit Chinese economic growth, they would also threaten Australian exports and the Antipodean currency in the process.

The Reserve Bank of Australia (RBA) is set to release minutes from its November policy meeting at 01.30 London time on Tuesday, 20 November, but this is unlikely to move the Australian Dollar much.

The RBA gave few indications after its latest meeting that policymakers had changed their views around the lifting rates. Markets continue to anticipate that Aussie interest rates won't rise until some time in 2020, which is still a fairly long way off, and the minutes are unlikely to signal any different.

Although recent employment and trade data has beaten expectations, above-target inflation remains elusive. Consumer price pressures are expected to remain low for the foreseeable future, limiting scope for interest rates to rise. For the currency this is negative.

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The Pound: What to Watch

All eyes will be on Prime Minister Theresa May and whether she can hold onto power.

There is confirmation the U.K. can get further concessions from the E.U., which is exactly what is required for the DUP and Conservative Party opponents to see eye-to-eye with eachother.

In a Sky News interview May says the key to the outlook would be the next seven days, when her negotiators would be going back to E.U. officials and hammering out the "future relationship".

She will also be visiting Brussels and will talk to E.U. Commission President Jean-Claude Juncker as part of the week's discussions.

May needs further concessions and the E.U. can quite clearly see the plan they have brokered requires some help. This news is a Pound-positive development.

Conservative rebels seeking May's ouster might this week eventually muster enough votes - 48 are needed - to force a vote of no confidence in the Prime Minister. This would be a Pound-negative development.

If May loses the vote she is out, if she survives she is immune to another challenge for a year.

"To unseat PM May successfully would require a majority and it is much less clear
that this number would be reached," says MUFG's Loew. "If PM May was surprisingly defeated in a leadership challenge, we would expect the Pound to fall by a further 3% to 5%. It would heighten concerns over a 'No Deal' outcome."

May winning a vote would be Pound-positive as it does suggest the room for manoeuvre by 'hard brexiteer' opponents is fast running out.

There were expectations that May would be subject to a no confidence vote on Friday, November 16, but the threshold has yet to be met, suggesting the rebellion might in fact be stalling. As of the time of writing there still appears to be too few letters to trigger a vote of no confidence.

If it does stall, we see it as a positive trigger for a potential, partial, recovery in the currency.

A key event in the week ahead for the Pound is probably the Bank of England Inflation Report hearings conducted by members of the House of Commons Treasury Select Committee, a parliamentary body charged with oversight of the public finances.

The comments from the Bank of England at this hearing, especially in relation to the trajectory of the economy and the effect of Brexit, could impact the Pound.

Recent economic data including CPI and retail sales were lower-than-expected, while growth data suggests a slowdown in activity into year-end.

The hearings are on Monday at 11.00 GMT.

The other key release is the CBI industrial trends survey out at 00.00 on Monday, November 19. Although unlikely to move markets on their own, CBI surveys are usually good leading indicators of future economic activity and, therefore, contribute to formulating the overall economic backdrop in which to access the Pound.

Public sector net borrowing is out on Wednesday at 10.30. Borrowing came out at -3.26bn on October. Overall government borrowing has fallen over recent years.

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Bank-beating GBP/AUD exchange rates. 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