The Pound-to-Australian Dollar Rate Week Ahead Forecast

Our studies show GBP/AUD at a crossroads with the potential to rotate higher but Australian jobs and UK inflation data will be key to near-term evolution.

The Pound-to-Australian Dollar exchange rate is falling in a short-term downtrend as the Aussie continues to enjoy a decent start to 2018 amidst an atmosphere of bouyant global markets and rising commodity prices.

Yet, take a step back and we see the GBP/AUD has fallen within the confines of a rising channel which tells us that the medium- to longer-term could in fact still favour Sterling and it could ultimately restart its move higher.

Those hoping for a stronger Pound will therefore have to show some patience as this trend lower is expected to continue, at least to as far as 1.7000 where the 200-day moving average (MA) is situated.

With the broader trend being up we think the short-term trend will probably reverse at the 1.7000 level or thereabouts and start moving up within the channel again. 

The exchange rate actually put in its best day of 2018 on Friday, January 12 when it reached highs of 1.7434 where the 50-day MA is situated. 

While the Pound has since backed down from those highs we note this price action as being potentially supportive. The MACD (circled above) is also showing upside potential after appearing to base out at the lows, probably on its way up.

This may already be the beginning of the new trend higher within the channel, although more confirmation would be required to signal a complete reversal of trend.

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Data and Events to Watch for the Australian Dollar

The main release for the Aussie Dollar in the week ahead is employment data out on Thursday, January 18, at 00.30 GMT.

Australian employment data has been particularly strong of late and analysts will be looking for more of the same.

Consensus estimates put the rise in jobs at 18k in December, after last month's excellent 70k, and the unemployment rate still at 5.4%.

The expectation will be for it to firmly hit 18k and if it disappoints by a considerable margin the Australian Dollar may experience some downside.

Wage data will also be important given the breakdown in the usual transmission between higher employment and rising wages.

Higher pay tends to translate into higher inflation and then to higher interest rates, which strengthen the currency by attracting greater inflows of foreign capital.

Consumer Confidence data out on Wednesday, January 17, could also be important for the Aussie.

Westpac Consumer Confidence for January is out at 23.30 GMT.

Data and Events for the Pound

The key data release for the Pound is inflation data out at 09.30 on Tuesday, January 16, which is forecast to ease to 3.0% compared to the same time in the previous year, from 3.1% in November.

Core inflation is likewise forecast to ease to 2.6% from 2.7% previously.

A higher-than-forecast print will probably strengthen the Pound as it will increase pressure on the MPC to increase interest rates in order to try and limit future inflation levels.

Higher interest rates are positive for currencies because they draw greater inflows of foreign capital with the promise of higher returns.

Analysts at TD Securities are marginally more hawkish, expecting inflation to remain at 3.1% and not fall back in December.

"Our 3.1% forecast for headline CPI is just above the top of the BoE's target range and well above the BoE's forecast of 2.7% from the Nov Inflation Report. Core CPI should soften by a tenth, but the big jump in energy prices into the end of the year will keep the headline well-supported," says TD Securities in a note to clients ahead of the new week.

Friday sees the release of retail sales data which often moves Sterling as it gives an insight into the health of the UK consumer.

The UK economy is heavily reliant on the retail sector and should data beat expectations we would expect some positive response in Sterling.

The bar is actually set quite low for a positive surprise as monthly retail sales for December is forecast to show a decline of 0.6%, a slowing from the previous month's growth rate of 1.1%.

Monday sees the Bank of England in focus with a speech from Silvana Tenreyo (above), the new member of the Bank's Monetary Policy Committee (MPC), at 18.15 GMT on Monday, January 15.

Not long after she first joined the BOE back in October 2017 Tenreyro said she would want to see UK employment improve and wages rise further before advocating raising interest rates - a move which would be bullish for the Pound.

"Silvana Tenreyro, an external MPC member, said she would need to see more evidence of the elimination of slack in the labour market before voting for a rate rise," says Chris Giles, Economics Editor at the Financial Times.

Yet the unemployment rate has not fallen since she said those comments and instead has stayed the same at 4.3% since September 2017, so assuming this is still her view, we do not expect her to talk up interest rates on Monday, which is on margin negative for Sterling.

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