Outlook for the GBP/AUD Rate: Favouring a Continuation Higher

The GBP/AUD has been recovering from the lows around 1.60 set in the middle of January to current levels in the 1.66s.

The pair has now pulled back down to its trendline and whilst it will probably resume its short-term uptrend from this level, there is also now a chance it could break lower and mark a change of the short-term trend for the pair.

A break below the 1.6560 level would confirm such shift into negative territory as the trendline higher will have been broken which could eventually lead to a move down to a target at roughly the 1.6500 level.

For confirmation of further upside look for a move back above 1.6720 which would confirm a resumption of the uptrend to an initial target just below resistance from the 50-day Moving Average at 1.6790.

A resumption higher is favoured over a break lower due to the bullish configuration which set-up on Monday, Tuesday and Wednesday, which formed a bullish Modified Stick Sandwich pattern.

Bank of England Dominates the Agenda

The Bank of England (BOE) forms the highlight of the coming week as policy makers deliver their monthly policy decision as well as the Bank's latest economic forecasts.

Analysts expect the Bank to be more positive on the outlook for the economy following ongoing resillience in the data. 

This could place Sterling is in a strong position in the week ahead.

Of interest will be whether forecasts to the inflation profile are moved higher.

The strong consumption and stubbornly low unemployment means the BOE has more room to tackle rising inflation caused by the weak Pound and rising oil price.

This, in turn, could lead to heightened expectations of a BOE rate hike and a change of stance from neutral to more hawkish, which would propel Sterling higher.

“We like buying Pounds into the Quarterly Inflation Report, especially as it dips toward 1.25 with a target of 1.27/1.28,” says BK Asset Management’s Kathy Lien.

However, Sterling remains a political currency and we expect major moves to be framed by the Brexit story.

“It's strange to see GBP performing so well when the path towards a 'hard' Brexit remains firmly on the table; strategically, we remain bearish on GBP/USD and look for fresh catalysts (namely dollar strength) to see a short-term move back towards the 1.24 level,” says ING’s FX strategist Viraj Patel.

Also watch UK PMI data this week with manufacturing, construction and services PMI’s being released on Wednesday, Thursday and Friday respectively.

Manufacturing is expected to pull-back a basis point to 56.0, Construction forecast to 53.8 from 54.2 and Services to 55.8 from 56.2.

This all points to the BOE delivering a more upbeat message on Thursday and strength for the Pound.

Wary of an Australian Economic Slowdown

The Australian Dollar, meanwhile, is in a relatively more vulnerable position due to recent data which has shown a slide in inflation.

The strong property market is also on the wane, adding to fears of an economic slowdown.

HSBC’s David Bloom is bearish the Aussie due to the increasing chance the RBA will have to cut rates in 2017.

This stands in contrast to the rising probability (50% now) that the BOE will hike rates in 2017.

With carry considerations eclipsing other major drivers of AUD at the moment, this does not bode well for the Aussie against the Pound and supports out bullish technical bias for the pair.

Other significant data includes Tuesday’s NAV+B Business Confidence at 00.30 GMT and December’s Balance of Trade out on Thursday at 00.30.

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