5-Day Forecast for GBP/AUD: Breakout Imminent
Pound Sterling edges higher against the Australian Dollar at the start of the new week having found some solid buying interest at a well-established support zone.
The reversal in fortunes might just bring an end to the poor start to 2017 that GBP/AUD has suffered having fallen from 1.7210 in early January to 1.5999 in early March.
Concerning the immediate outlook, the Pound to Australian Dollar exchange rate has been tapering to the apex of a steadily narrowing cone-like range of late.
This range’s lows are at 1.5980 and the highs have now sloped down to just above the 1.6200 level.
A breakout seems imminent given the range can’t taper much narrower before the exchange rate exits it.
Our view is that there are more signals showing a probable upside break in the making than a downside break.
First off there is the large bullish day on Thursday, which also happened to be a bullish engulfing candlestick, then there is the fact it was followed by an indecisive, marginally bearish doji candlestick on Friday.
Just that setup alone seems to favour more upside rather than downside on the horizon.
Next, there is the momentum indicator (MACD) which has remained elevated during the recent sell-off, showing underlying strength and a lack of momentum lower.
There is an old adage which says, “never short a dull market,” (short means sell) and this comes to mind when looking at that lacklustre momentum during the recent sell-off.
So, whilst this isn’t by any means a conviction call, we favour a breakout higher to a possible target at 1.6330.
For confirmation of the breakout we would want to see a move above the 1.6280 Friday highs.
Data, Events to Watch for the Aussie
The main event for the Aussie in the coming week is the Reserve Bank of Australia (RBA) rate meeting on Tuesday, March 7 at 03.30 (GMT).
Recent mixed economic data means the RBA may not sound as confident about the outlook as they did at their last meeting.
The Trade Balance has shrunk to 1.3bn and Exports have declined by 3.0% due to the overly strong currency making them less attractive, according to BK Asset Management’s Kathy Lien.
“These misses are important," she says refereeing to the data, “going into this week’s RBA monetary policy announcement.”
“Since then, we’ve seen Business Confidence upside while labour-market activity and consumer inflation expectations weakened significantly. In other words there are new factors..”
Investment Bank TD Securities meanwhile take a more positive view.
“The RBA is universally expected to pause again at 1.5%. The global backdrop is favourable, where the Fed could hike as soon as this month, and Chinese hard landing fears are now a distant tail risk,” said TD’s analysts.
The highlight the strong Q4 GDP numbers as a favourable indicator although admit that these are offset by the weak hours worked and excess capacity in the labour market.
UK Data to Watch Between March 06 - 10
News that the Chancellor may be increasing taxes in his Budget on Wednesday, March 8, may weigh on the Pound if the measures are seen as inhibiting growth and consumption.
Fiscal tightening would stand in contrast to the policies being implemented in the US by Donald Trump's administration, for example, who are expected to cut taxes and spend more on infrastructure.
On Tuesday, March 7 there is the release of tier two data for the Pound in the form of the Retail Sales Monitor from the British Retail Consortium (BRC).
It is a survey rather than a hard data release but sentiment indicators are still often quite reliable indicators of future activity.
The monitor, out at 00.01 (GMT) is expected to show a 0.2% rise in February from the -0.6% decline in Jan.
Overall, recent UK data has been described as soft, and this combined with the resurfacing of fresh Brexit risks relating to calls for a Scottish referendum are have been weighing on Sterling.
Currently the market is of the opinion that the related uncertainty caused by Scotland is negative for Sterling so more losses may be on the horizon as the narrative unfolds. There is talk that the Scottish Nationalists may call for a referendum as the UK triggers Article 50.
“Sterling fell hard this week as data took a turn for the worse. After a month of very narrow trading ranges, sterling finally broke down on the heels of softer data. Aside from slower service-sector activity, manufacturing activity also eased in February and between the stronger U.S. dollar, Scotland pushing for another referendum vote and Brexit's Article 50 later this month, it was only a matter of time before the bottom underneath Sterling fell out. Now that support has been broken, we anticipate further losses in GBP,” says Managing Director of BK Asset Management, Kathy Lien in a recent note seen by Pound Sterling Live.
Budget is Key Political Event
UK politics are this week dominated by the UK budget on Wednesday when the Chancellor lays out his spending and taxation plans as the country heads for Brexit negotiations.
What could be quite Pound-poisitive would be an opening of the purse-strings and an intent to increase spending and cut taxes.
This is of course highly unlikely as Chancellor Hammond is a fiscal conservative and while some give-aways will be announced they will be modest.
The surprise would be a notable expansion in spending in anticipation of an economic slowdown relating to Brexit.
However, the economy's resillience suggests the Chancellor would rather head into the unknown with a 'war chest' of savings should activity take a dip in coming years.
