British GBP/AUD Forecast for the Week Ahead: Advantage AUD

The GBP to AUD exchange rate pair is pulling back down again after rising through the course of May from the April lows.

A stronger showing for the anti-EU camp in recent polls has weakened sterling with the Remain campaign losing that GBP-positive lead it had established over the course of May.

At the time of writing poll-of-poll data shows both camps are evenly matched confirming the prospect for a major move in either direction should either side gain a lead over coming days.

So steep is the pull-back in the GBP/AUD though there remains a good chance it could move even lower, perhaps down to the 50% retracement level of the previous rally, at 1.9413, a common level for corrections to end.

The declines will have come as a shock to those with impending GBP-AUD payments as they would have looked at exchange levels towards 2.03 at the start of the week. At the time of writing they may only be looking at rates between 1.8997 and 1.9135 with their banks.

Independent retail providers are seen offering currency in the 1.9371 to 1.95 vicinity.

There is tough support directly under the current price level, from the monthly pivot (PP) at 1.9858, however, and we would ideally wish to see that cleared before expecting a continuation lower, to the target at 1.9413.

A break below the 1.9832 lows would reinforce the bearish case, with a move below 1.9775 providing strong confirmation of an extension to 1.9420, just above the 1.9413 level of the 50% retracement.

Assuming no break below the current 1.9832 lows, however, and the steep up-trend, prior to the current June pull-back, is likely to resume pushing the currency pair higher.

We cannot be sure the pair will extend, however, unless there is a break above the existing highs at 2.0530. Such a break would lead to a probable extension up to 2.0650 just below the ceiling provided by the R1 monthly pivot.

Dominating the economic calendar for the Aussie is the Reserve Bank of Australia’s (RBA’s) interest rate meeting on Tuesday June 7.

Few analysts expect a cut from the central bank this soon after the previous cut in April.

Recent data has been quite strong with a rise in retail sales, job growth and a narrower trade deficit.

The rebound in commodity prices has helped the economy, whilst the broadly weaker currency has helped stimulate demand for Australian exports, so all in all the current is now behind the currency, not against it.

Indeed current dollar weakness is giving a backdraft to commodity prices which will probably pass-through to more AUD demand and therefore a strionger currency. 

Iron Ore has jumped higher from $52.4 to $54.4 per tonne over recent days after speculators pushed up the price on falling Chinese iron ore inventory data, expectations of public stimulus funds focusing on iron rich large-scale infrastructure projects and continuing speculation on Chinese futures exchanges despite new regulatory changes.  

Nevertheless, despite the commodity's recovery, broker TD Securities note that the recent May Services Index showed some worrying signs of deflationary pressures, after the, “7.5 point drop in wages, the 6.6 point drop in capacity utilisation and the 5.3 pick up in stocks. Also input costs dropped nearly 3 points. These data prints point to little upside inflation pressures.”

If the RBA expect prices to fall this will increase pressure on them to cut rates, potentially even earlier than currently forecast.

The soft inflationary outlook is backed up by commentary from St George Economics, who note, “Wages growth remains soft and population growth is lower than in previous years.”

Australian Dollar Treads Higher Against Pound as Job Ads Provide Boost

The pound to Australian dollar exchange rate (GBP/AUD) is seen lower as the new week gets off to a positive start for the Antipodean currency thanks to a better-than-forecast economic data release.

Australian job advertisements rose by a sharp 2.4% m/m in May and 9.1% y/y. The strong growth in May follows a small fall in April and a broadly flat trend since October last year. In trend terms, job advertisements were up 0.1% in May.

The number of internet job ads rose 2.6%, while the more volatile newspaper component fell 12.6% m/m.

“After six months of broadly flat job ads, the strong rise in ads in May is encouraging. Despite some ongoing headwinds, the economy is tracking along quite well and the transition to non-mining activity is occurring,” says ANZ’s Head Of Australian Economics Felicity Emmett.

The rise in job ads is consistent with the strength in business conditions, which point to ongoing solid growth in the economy. Last week’s strong Q1 GDP report shows that the non-mining economy is gaining traction, with housing and the services sector key drivers of this strength. These sectors are also clearly helping to support jobs growth.

“Despite the recovery in activity, wages growth remains low. Ongoing weak wage growth has helped to support solid employment gains over the past year or so and is likely to continue to do so. But very low growth in labour costs is feeding through to very low inflation. With inflation set to stay outside the RBA’s target band until at least mid-2017 we expect to see another cut in the cash rate in August to a low of 1.5%,” says Emmett.

The Pound, Some Data Ahead, But EU Referendum Polls Key

Sterling is presently being weighed down by a fresh bout of uncertainty stemming from EU referendum polling which suggests a sharp swing towards Brexit.

At the start of the week starting 6th June the momentum towards Leave has been confirmed by the latest fortnightly Opinium/Observer poll which showed those in favour of Leaving now stand on 43% with 40% saying they will vote to Remain.

This is an about-turn on their previous poll - published May 21 - that showed remain four points ahead on 44%, with leave on 40% and 14% undecided. The poll of polls now shows a 50/50 split on the outcome, a scenario that pound will not like.

As far as data for the pound in the week ahead goes, the highlights will probably be Manufacturing Production on Wednesday, however, given the subdued Manufacturing PMI result, which although better-than- forecast, and back into growth territory, was nevertheless still historically low, there is little expectation of a strong result.

Despite Friday’s Services PMI release showing a higher than expected result in May, it remained historically low and pointed to a slowdown in growth in the second quarter.

Many respondents in the Services PMI survey highlighted uncertainty over Brexit as a major reason for the slow-down, and this may garner support for the Remain campaign which would immediately resolve such uncertainty.

A vote to leave the EU, however, would extend the period of uncertainty until the negotiations with the EU to leave had been completed, a period of time which most analysts estimate will take over two years.

There appears to be little stomach from the business community for such an extended period of hiatus.