The Australian Dollar is Forecast to Strengthen Against Pound Sterling into Start of August

Our study of the GBP to AUD exchange rate suggests the bearish bias for the pair is likely to extend.

The Pound to Australian Dollar exchange rate (GBP/AUD) has taken a notable step lower at the time of writing confirming our forecasts made ahead of the week commencing 25 July.

Our studies suggested the pair would trade with a negative bias, putting an end to the July recovery.

At the time of writing the mid-market rate is at 1.7394 and your bank account will likely see you transferring GBP into AUD between 1.6907 and 1.6785. 

Independent providers are quoting between 1.7237 and 1.7116.

While GBP/AUD had been correcting higher through much of the month-to-date, the ‘pull-back’ appears to be running out of steam and vulnerable to a breakdown and the recommencement of the dominant down-trend.

This suggests either Aussie strength or pound weakness, or a combination of the two in the coming week.

The weekly chart is showing a 2-bar set-up which gives a roughly 65%+ probability that the next week will be a down-week.  

This set-up is formed of two up-bars in the midst of a steep down-trend.

The four-hour chart is showing the exchange rate has broken below the lower channel line of a rising channel.

Since the break it has pulled back higher again to re-touch the trend-line, in what is almost certainly a ‘throw-back’ or ‘return move’.

This is likely to be a temporary recovery before the pair ‘air kisses’ the channel line ‘goodbye’ and continues its way lower.

It will probably now fall more deeply, with a downside target at 1.7350, based roughly on the height of the channel extrapolated from the point of the break down.

Such a move would be confirmed by the exchange rate passing below the 1.7490 lows.

In the bottom pane the MACD momentum indicator has crossed below its signal line giving a mild bearish signal.

Australian Data to Watch

The biggest release for the Aussie dollar in the week ahead is second quarter Inflation data on Tuesday (Jul 26).

Analysts expect CPI to show a rise of 0.4% qoq from -0.2% in Q1.

The greater the rise the more beneficial for the Australian dollar as it will lessen pressure on the Reserve Bank of Australia (RBA) to cut interest rates, as many expect the bank might in August.

Cuts to interest rates tend to be negative for currency's as it stems global investor demand for that country's debt whose yield has just been diminished.

With a basic interest rate of 1.75%, Australia remains a popular destination for investors seeking out yield. This has in turn kept AUD well bid.

The Carry Trade strategy – borrowing in low-interest rate currencies to buy higher-yielding ones – has made good money for speculators these last 2 months, according to a Deutsche Bank AG index.

The Japanese Yen (Jpy) is the common denominator currency that has an ultra-low interest rate which becomes the borrowing currency.

"The New Zealand Dollar, or kiwi and Australian dollar (aussie) are the highest-yielding pairs, with interest rates sitting at 2.25 percent and 1.75 percent, respectively. This undoubtedly makes them strong targets for potential Carry Trade," notes ForexSignal.com in a note to clients at the start of the new week.

ForexSignal have reflected that the return-to-favour of this strategy in the present environment is proving a source of notable support for AUD.

However, should this yield advantage be diminished further by RBA policy makers, we could well see demand for AUD fade.

An undershoot in inflation, would therefore be important as it could trigger an August rate cut of 0.25% according to analysts at broker TD Securities, who expect the annualized core CPI figures coming out lower than RBA projections:

“We see core inflation printing at 1.25% y/y, below the RBA’s 1.5%/yr projection. A downside miss compared with the RBA’s projections would be a potential trigger for a 25bp cut next month to 1.5%.”

UK Data to Watch in the Coming Week

Second quarter GDP data is the main release for Sterling in the week ahead.

Currently analysts are expecting a 0.5% rise from 0.4% previously (qoq), and 2.1% from 2.0% yoy.  

The result will be overshadowed by the negative impact of Brexit, however, which renders the data for April-June somewhat redundant in terms of future economic developments.

It will only be in August that we start to get some notable post-Brexit ecostats on which traders can latch onto.