GBP v AUD: Technical Forecast for Early August
The Pound to Australian Dollar exchange rate is correcting higher within the context of a broader sustained period of weakness.
At the time of writing GBP/AUD is quoted at 1.6496 as the Australian Dollar fades lower following the Reserve Bank of Australia's August policy meeting.
At its meeting on August 1, the Board of the RBA decided to leave the cash rate unchanged at 1.50%. The move was expected by markets and focus was instead directed at the decision’s accompanying statement.
The closing paragraph added this line:
“The low level of interest rates is continuing to support the Australian economy” which suggests the RBA is in no rush to raise rates.
This might have been a reason the Aussie edged lower. However, there was also mention of the currency itself:
“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast... the higher exchange rate is expected to contribute to subdued price pressures in the economy… it is also weighing on the outlook for output and employment."
In all, this was hardly a determined - and convincing - attempt by authorities to mute the Australian Dollar's rally and there is very little here to worry the bulls and halt the currency's ascent.
Indeed, our studies suggest the correction higher, which appears to be a three-wave abc pattern, looks almost complete and the next move could be a resumption of the downtrend.
A break below the 1.6259 lows would probably confirm a continuation – initially to a target no lower than1.6200 where Trendline A is situated and likely to provide an obstacle to further downside.
A break below 1.6150 would probably indicate the trendline had, however, been broken the pair was going even lower.
Another possibility is that the abc correction is the start of a larger corrective move higher, but for this to be confirmed we would first want to see a break above the 1.6550 level to an initial target at 1.6690, just below the level of the 200-day moving average.
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RBC capital markets are bullish the Aussie versus the Pound as, “absent any shift in rate expectations, our default position remains to buy dips in AUD as the outright yield continues to draw in investors while volatility and global yields remain historically low.”
RBC's Adam Cole has made a sell on GBP/AUD his conviction 'trade of the week' - for more details of this trade please see here.
Other major releases for the Aussie, include Building Approvals, out at 2.30 BST on Wednesday, August 2, which is expected to show a 1.5% rise from a – 5.6% result in the previous month of May.
The Trade Balance is out at 2.30 on Thursday and forecast to show a 1.8bn surplus from 2.7bn previously.
Retail Sales for June is also out at 2.30, on Friday August 4, and is expected to show an increased 0.3% rise.
Data, Events for the Pound this Week
The Bank of England (BOE) rate meeting is the main release for the Pound in the week ahead.
The meeting, scheduled at 12.00 BST on Thursday, August 3, is not expected to result in a change of policy, despite the relatively close vote of 5-3 not to raise interest rates at the previous meeting.
“There has been a lot of speculation that the BoE is about to change tack. But, for now, policy still seems set to remain on hold,” said Lloyds Commercial Banking’s, chief economist, Rhys Herbert, who forecasts a 6-2 split in favour of keeping interest rates unchanged.
TD Securities agree with the view that the BOE will vote 6-2 to stay on hold:
“While the BoE took a more hawkish stance in June with a 3 MPC members voting for a hike, we look for a 6-2 vote this time as the uber-hawk Forbes departs and most top-tier data has surprised to the downside since Haldane’s hawkish speech in June.”
Recent strong GDP data is probably not going to be enough to encourage a rate rise, despite coming out up by 0.3% on the previous month – against 0.2% forecast – and 1.7% higher on an annualized basis as this is still well below the rate of inflation which is circa 2.7%.
RBS’s chief economist notes how the dominant Services sector is holding overall growth up.
He adds that there are two schools of thought about this, with the first composed of optimists, for whom, “the strength of the service sector, representing 80% of the economy, shows the underlying resilience of growth with services now 2.3% bigger than a year ago,” whilst pessimists argue that the, “falls in production output are being masked by a short-lived expansion of services that’s doomed to fall victim to the real income squeeze.”
The BOE’s quarterly inflation report will also be released on Thursday, however, the consensus estimate is for little change to forecasts.
The other major releases for the Pound in the week ahead are Manufacturing, Construction and Services PMI’s released on Tuesday, Wednesday and Thursday respectively, all at 9.00.
PMI’s are currently broadly range bound around the 53-4 level for all three sectors and they are expected to remain around those levels.
Services is forecast to rise by a mere basis point to 53.5, Manufacturing to stay at 54.3 and Construction to dip to 54.0 from 54.8.
Any result over 50 is indicative of expansion, whilst anything below 50 shows overall contraction of the sector.
