GBP/AUD Rate Outlook for the Week to Come: Poised to Move Higher Again
Recent weeks have seen GBP/AUD move up from 1.60 lows to its current level in the 1.73s and we expect a continuation of that 'young' uptrend higher.
At the start of the new week we see the exchange rate quoted at 1.7270.
Although there is an increasing risk of Sterling falling in the coming week as the election looks like a closer race than had previously been thought, AUD has problems of its own, with iron ore heading south and China in trouble.
Reviewing the charts, however, we note that the pull-back of the past few days has petered out and GBP/AUD now appears poised to move higher again.
Robust support at the 1.7215 level of the neckline of the previous double bottom has prevented a deeper pull-back and now appears to be providing the base for a resumption higher.
The move up from the March lows looks like a bullish flag pattern which denotes more upside to an eventual target at 1.85 - the length of the 'pole' extrapolated higher from the flag.
A major trendline lies in the way, however, at the 1.80 level and is likely to be the first stop for the pair in its bid to continue higher.
The MACD has broken above the zero-line which is a sign the trend has changed and is likely to extend higher.
The indicator has also formed a sort of inverse head and shoulders pattern at the same time as price formed its double bottom which lends weight to the possibility the pair could be reversing trend.
A break above the 1.7652 highs would probably lead to a move up to a target at 1.8000.
Data, Events to Watch for the Aussie
The highlight of the week for the Australian Dollar is Tuesday’s Reserve Bank of Australia (RBA) rate meeting at 05.30 BST.
The Reserve Bank is expected to take a neutral line and not to change rates, according to analysts at ING bank.
“Expect a firmly neutral RBA (market prices flat rates out to 1y) and RBA also welcoming 6% decline in AUD TWI since March,” says Chris Turner at ING Bank N.V.
A neutral response will not particularly impact on the Aussie Dollar.
The next release after that is first quarter GDP out on Wednesday at 02.30 BST, which ING expects to come out lower at 0.3%, although Canadian based investment bank TD Securities think it will come out at 0.4% in line with market expectations.
“Speculation that Q1 GDP will shrink is likely to be unfounded, although Q2 will be soft if the impact of the cyclone/floods shaves up to ¼ppt off growth. While RBA looks through temporary flood distortions, if consumer and investment spending continue to disappoint, expect talk of rates cuts to grow even louder. We are of the view that lofty house prices and financial risks do not need more rate cuts,” say TD Securities.
Data, Events for the Pound
The key event for Sterling is the election on Thursday. Most commentators expect a Conservative win but Labour has recovered to within 3% of the Tories in the polls from over 20% but three weeks ago and there is now a threat of there being a hung parliament.
“A failure to secure a more comfortable margin of seats (17 as of now) would weaken May’s position going into Brexit talks,” said NBF Economics Strategy.
A small majority would lead to the Pound weakening – only a majority of over 30 would help Theresa May in negotiations and support Sterling according to ING.
“We think were Theresa May's government to increase its working majority into the 30-50 seat area in Thursday's vote, GBP could enjoy a very modest bounce,” ING’s Chris Turner.
“The main risk to GBP is an even smaller Conservative majority or a hung parliament. This would send EUR/GBP to 0.89 and USD/GBP to 1.26,” continued Turner.
Other major data releases, including PMI’s are likely to be completely overshadowed by Thursday’s election.
But we will be watching the release of Service PMI data from IHS Markit and the CIPS on Monday.
Construction and Manufacturing PMI data have both surprised to the upside and confirm that the
UK economy is seeing activity accelerate in the second-quarter of 2017.
Recall the first-quarter only saw growth rise by 0.2%.
The services sector accounts for in excess of 80% of UK economic activity therefore we must see a similar beat on expectations in this sector to confirm the economy is picking up speed again.
Analysts are forecasting a reading of 55.0.
