GBP/AUD Rate 5-Day Outlook: "A bullish Continuation Set-Up"
Pound Sterling starts higher against the Australian Dollar as we move through the opening stages of the new week.
GBP/AUD is quoted at 1.6416 and
The GBP/AUD pair has moved lower as the Pound has depreciated due to Brexit fears and the Australian Dollar has gained strength mainly from rising commodity prices.
In 2007 it has been in an uninterrupted downtrend which has taken the exchange rate from its 1.7230 peak down to recent lows of 1.5892.
Last week, however, witnessed a complete turnaround in prices, which rose up rapidly and steeply and broke above a key multi-month trendline in a very bullish move.
To the upside, a recent break above the downward-sloping trendline was also followed by a breach of the 50-day moving average - another resistance level which is normally very difficult to break above.
At the same time, the pair has formed a bullish continuation set-up, which carries a relatively high probability of a continuation higher.
The set-up is comprised of a long bullish candle followed by an indecisive narrow candle and then another long bullish candle.
When this forms in an uptrend it is normally a sign that the market will continue higher.
Unfortunately, there is no corroborative evidence from the ADX indicator which would have to be rising rather than falling to fulfill the criteria.
We cite the solid support at 1.60 as being key to this exchange rate's evolution - buying interest picks up at this level and continues to make it hard for the pair to fall below here.
We watch for 1.60 to remain the line GBP/AUD is unlikely to go below.
The Week Ahead for the Australian Dollar
It promises to be an unusually quiet week for the Australian Dollar, with the highlight probably New Home Sales out at 01.00 GMT on Thursday, March 30, and showed a fall of -2.2% in the previous month of January.
The Week Ahead for Pound Sterling
Theresa May’s triggering of Article 50 is likely to be the main event in the coming week; and Wednesday 29 is a likely date.
“We expect GBP/USD to fall quickly when the announcement is made but it should recover swiftly when the inevitable happens and investors finally realise the negotiation process will be long and filled with delay,” says Kathy Lien, managing director at BK Asset Management.
Why Sterling would fall after the event is perplexing in our view - it is clearly well signposted and there is unlikely to be any new information on the outlook.
Any potential drivers for Sterling will come in the succession of events following the triggering of Article 50 - for instance, the Europeans laying out their proposed negotiating timetable. But event here we see little of substance to bother the Pound. It is only when negotiations get underway in earnest will Sterling move.
Analysts at Barclays meanwhile reckon that the triggering of Article 50 could potentially align with a longer-term recovery they expect Pound Sterling to undertake.
“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in GBP from historic undervaluation as ambiguity over Brexit recedes,” says Marvin Barth, a foreign exchange analyst with Barclays bank in London.
Expect the European Commission to slap a divorce bill on Britain in the early stages of this whole process.
The Commission wants the UK to pay for all its outstanding spending commitments until 2020, which amounts to a bill of 50-60 billion Euros. Needless to say the UK does not agree with the figure.
Why would it the UK pay for a club it is no longer part of? Yes, these spending committments have been made, but they were made under the assumption that the UK would benefit from single market it is helping maintain via spending committments.
The EU wants this issue dealt with ahead of trade negotiations which suggests they don't want the UK to use the bill as a negotiating chip. Understandably, the UK wants the bill and negotiations to run concurrently.
We expect the tug-of-war over these various issues to potentially inject volatility into Sterling markets, but don't see any fundamental shift in direction resulting.
It is the trade negotiations that will be of utmost importance and these will only likely be tackled towards the end of 2017.
On the data front, it is a quiet week.
GDP data is out at 08.30 GMT on Friday March 31 but it is just a third and final revision and therefore highly unlikely to surprise. Growth for the final quarter 2016 is forecast to remain at the 0.7% announced by the ONS previously.
Mortgage Approvals, also out on Friday are not forecast to move much and thus seem unlikely to have much impact on the market.
