Pound / Australian Dollar Remains at Risk of Further Weakness into Mid-Week
The Pound to Australian Dollar rose marginally on Tuesday following an equally diminutive rebound on Monday making two up days in a row this week so far.
The pair saw some volatility on the release of Australian Building Approvals data for April, which showed a seasonally adjusted increase of 4.4%, a result which compared positively to the -10.4% contraction in March.
Building Approvals make up a volatile data range so there is little to be concluded from one upbeat print and a more consistent uptrend would be required to impact on the currency.
The Australian Dollar rose versus the Pound on Friday despite its own not inconsiderable headwinds, when iron ore prices remained under selling pressure, “with prices falling by nearly 4% on Friday to US$57.91 per metric ton – the lowest level since October,” according to ST George Economics in a note on Tuesday.
Yet despite the downturn in Iron Ore the GBP/AUD pair still fell at the end of the week as Brexit fears outweighed commodity moves.
The two weak up days this week are not very compelling and have actually formed a relatively high probability bearish trading set-up.
If today remains green (by closing higher than it opened) it will signal that there is a roughly 66% chance Wednesday will be a bearish day closing lower than it opens.
In a downtrend when two small up days form after a strong sell-off there is an increased chance the next day will be a red down day.
Beyond Wednesday the trend looks more likely to be turning lower as we noted in our weekly forecast.
A break below Friday's 1.7158 lows would confirm a continuation south to the next major support level at 1.7025.
The Aussie was recently hit by Moody’s credit rating downgrade of China due to the country’s high levels of general indebtedness.
Further data out on Wednesday from China could help clarify how bad the situation is there.
Both Manufacturing PMI and Caixin Manufacturing PMI are to be released.
A move below the key 50 level which distinguishes growth from contraction would be a major handicap for the Aussie going forward and lead to a continuation of the current recovery, although technically this looks less likely than good news which will boost the Aussie, pushing GBP/AUD back down as suggested by the high probability set-up.
