Pound Sterling to Australian dollar forecast: A Deep GBP/AUD Decline is Now on the Cards

By Gary Howes

The latest pound sterling to Australian dollar forecast issued by a prominent technical analyst warns of a deeper decline in GBP/AUD ahead.

The British pound has finally seen a strong challenge to its ascension with serious declines being triggered by today's Manufacturing PMI data.

The result is a deterioration in the technical outlook for the UK currency. We hear from analyst Fawad Razaqzada at Forex.com as to how the decline has impacted the forecast for the pound sterling to Australian dollar exchange rate:

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"A quick look at the daily chart of the GBP/AUD (below) suggests a reveal may already be underway. On Friday 24 January, the cross rallied hard into the key 1.9150 area having earlier broken the psychological 1.9000 mark. However it was rejected sharply there, causing price to close back below 1.9000. As a result, it carved out a very bearish-looking hammer/shooting-star candle on the daily time frame and also formed a false breakout reversal pattern.

"A trading session later, it formed another doji candle again on the daily chart which suggested indecisiveness was running high. Consequently, the longs started taking profit on their positions and fresh sellers emerged. The reversal was finally confirmed on Thursday when it had one final attempt at 1.9000 before heading south.

"What makes this particular case more interesting is the fact that this apparent top has occurred around the 38.2% Fibonacci level of that large downswing from the 2008 high (see weekly chart), as well as the 161.8% extension level of another much-shorter-term upswing.

"The 38.2% Fibonacci level represents a relatively-shallow retracement, meaning we could well see a significant pullback if more support levels such as 1.8215 are taken out."

US dollar strengthens

While the GBP comes under pressure the same cannot be said for the USD.

The USD made gains towards the end of last week, in part due to month-end flows and the weaker risk sentiment also helped USD gains against the high-yielders.

Focus turns back to the data with a string of key releases from the US this week.

"After the Fed announced a further $10bn of tapering as widely expected last week, the market will be looking for evidence for a potential pick up in pace of tapering. ISM survey and ADP will be important but the highlight will be payrolls at the end of the week," say Lloyds Bank Research.  

The market will be looking for a strong rebound after the weak headline print last month. For today, ISM Manufacturing will be the focus, with particular attention on the employment component.

ECB interest rate cut ahead?

The euro remains resilient, however we could see this change on Thursday should a surprise be sprung by the ECB.

Eurozone CPI estimate came in weaker than expected easing to 0.7% y/y. We note the ECB cut the refi rate in November following a similarly weak CPI print in October.

The weak January CPI print has raised risks of further monetary policy action by the ECB, however on balance we expect the ECB to wait for more information.

Nevertheless, it will have increased market concerns and will likely keep EUR on the back foot ahead of Thursday’s meeting. Eurozone PMIs may attract some interest today, the flash French and German PMIs were broadly firmer than expected; a similar upside surprise for Italian and Spanish numbers will likely provide some support for EUR.