Pound v Australian Dollar Forecast: Gains if These Key Conditions are Met on the Charts

The Pound to Australian Dollar exchange rate has been making a recovery over the last two weeks or so as UK political risks have eased. 

The pair has moved from lows around 1.6614 registered on June 20 to climb back to 1.6950 where it is quoted on the first trading day of July.

Our technical studies suggest that GBP/AUD has now reached a key transition point where any more upside could herald the beginning of a new trend yet further weakness is still a possibility.

Looking at the daily charts - which give us a forecasting horizon of a few days to a couple of weeks - reveals solid clues for the future.

The pair has bounced after reaching the midpoint, or 50% Fibonacci level, of the previous uptrend:

The 50% level is often where trends rotate, and this could be the case for GBP/AUD, since it has started moving up from the 1.6600 lows to reach highs above 1.7000.

So far, the move is only a correction, a 3-wave pattern – an a-b-c correction – but if the exchange rate breaks above the 1.7046 highs then that would create a higher high and probably confirm a reversal of the trend.

Such a move would probably result in the exchange rate moving up to a target at 1.7150 where the 50-day moving average is situated.

The MACD is showing a definite upside bias too having crossed its signal line at the bottom of a mini-cycle low.

A failure to break above the 1.7046 peak and a move back down to the 1.6600 lows, however, would signal a possible continuation of the short-term downtrend lower.

A break below the 1.6600 lows would confirm more downside, with a target at 1.6500.

Data, Events to Watch for the Australian Dollar

The main event for the Aussie will be the meeting of the Reserve Bank of Australia (RBA) to set the interest rate, which is due on Tuesday at 5.30 BST.

“Most economists expect the central bank to keep rates unchanged at the current record-low of 1.5% for the tenth straight meeting and maintain its neutral policy stance, as it balances the risk of rising household debt against subdued inflation and wages growth,” said analysts at Investing.com

Although Australia’s terms of trade have improved recently from a recovery in the price of iron ore and the labour market is looking healthy, BK Asset Management’s Kathy Lien suggests the RBA might be disconcerted by the strength of the Aussie, which could make exports less competitive, and play down the improvements.

“Going into this month’s meeting, we’ve seen further improvements in the labor market, a rally in iron ore prices and stronger Chinese import demand but businesses are nervous, home loans are falling and the trade surplus shrank significantly in April. So the central bank has no reason to change its views and if anything, it could express greater concern about the rising currency,” said Lien.

On the hard data front, another key release is Retail Sales on Tuesday morning at 02.30.

The data is expected to show a more subdued 0.2% rise in May over the stonking 1.0% gain in April.

The Trade Balance is out on Thursday at 02.30, and is expected to show a doubling of the trade surplus to over a billion, or 1.1bn in May from 0.55bn in April.

Data, Events to Watch for the Pound

The next week is dominated by PMI survey data for June, which shows monthly changes in activity in key sectors of the economy.

PMI’s are plotted on a gauge, with a result below 50 representing contraction and above 50 expansion.  

On Monday at 9.30 BST Manufacturing PMI is released and is expected to tick down to 56.5 from 56.7.

On Tuesday at the same time Construction PMI is forecast to fall to 55.00 from 56.00.

Finally, on Wednesday the most important PMI for the Services sector is forecast to show a fall to 53.5 from 53.8.

The results will be analysed within the context of ongoing concerns about growth given the sharp slowdown which has occurred on the high-street and the fall in real wages.

Investment bank TD Securities see a chance of an even deeper undershoot than consensus, with Manufacturing falling to 55.7 rather than 56.5 and Services to 52.8 rather than 53.5.

“Given the political uncertainty that came out of the general election, we look for a decline in the June PMIs, though much more moderate than the post-Brexit shock last year. We saw the first hint of that kind of reaction with the GfK consumer confidence survey, which saw a fairly sharp decline in June.”

Clearly a surprisingly weak figure will hurt sterling.

Other data includes Manufacturing and Industrial Production, the NIESR GDP Estimate and Halifax House Prices, all out on Friday at 09.30 BST.