Australian Dollar vs. Pound: Week Ahead Forecast Shows Upside Potential

- GBP/AUD is showing the potential for a break higher

- A move above 1.7980 could signal a new up phase for the pair

- Key for the exchange rate this week will be navigation of UK political uncertainty

Pound Sterling starts the new week softer against the Australian Dollar with the GBP/AUD exchange rate quoted at 1.7842 at the time of writing having started the day higher at 1.7881. The Aussie appears to be a winner of the generally positive tone greeting global markets at the start of the new week with traders having no fresh trade war news to digest.

Although still broadly range-bound, the GBP/AUD exchange rate is showing tentative signs of bullishness we believe.

From a technical perspective, the pair is trapped between the jaws of two major moving averages, the 50 and 200-week, on the weekly chart at first suggesting a propensity to a range-bound mode in the future.

Yet zooming into the daily timeframe chart presents us with a more bullish picture.

The strong move up from the June 5 lows saw the exchange rate rise from 1.74 to 1.79 during the first half of June after which it plateaued and started going sideways.

The strong rally followed by the shallow correction normally suggests ab eventual continuation higher, although given the lack of an overarching trend we would need to see more confirmation from a break above the 1.7980, with an upside target at 1.82, before committing to an outright bullish stance.

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UK Government Uncertainty to Weigh on Sterling, Progress Could see GBP/AUD Sharply Higher

For GBP/AUD much will depend on how the latest bout of political uncertainty in the UK plays out.

The past 24 hours have seen the resignation of the UK's most senior Brexit minister, David Davis, in a sign that unity on the government's heavily-contested Brexit strategy remains as elusive as ever.

At the end of last week it appeared enough compromise had been struck to allow for an unified UK position on the future UK-EU trading relationship, Davis' resignation casts doubt on this and markets will be looking to see whether further resignations take place.

May's official stance on Brexit appears to be softer than some colleagues would like, but this is probably a good thing for Sterling if she survives and delivers on her vision.

"This looks like a pretty ‘soft’ Brexit. What matters for GBP markets now is whether Brussels can work with this plan. If they can - could see a pretty big relief rally in GBP. If not, last paragraph of ‘No Deal’ Brexit preparations comes into focus & GBP under pressure," says Viraj Patel, a foreign exchange analyst with ING Bank N.V.

The new plan maintains a frictionless border with the EU but at the same time allows the UK to freelance its own trade deals overseas collecting tariffs on behalf of Brussels for goods arriving on English shores destined for the EU.

The plan appears to provide a compromise on most of the major previous sticking points but Brexiteer purists view it as Brexit 'in name alone' as it de facto keeps the UK in the common market whilst removing its right to a veto, and there are already rumblings of descent from euro-skeptic backbenchers.  

Yet for financial markets, it is likely to be received as a sensible proposal and therefore better for the economy. If it gains traction and becomes a realistic solution the Pound should bounce back in the week ahead. The main determinant of whether the deal has longevity is the reaction of EU partners in Brussels, especially on the sticking point of freedom of movement.

Data and Events to Watch in the Week Ahead for Sterling

The reaction of the EU to Theresa's new Brexit proposal, especially that of the EU's chief negotiator Michel Barnier, will be a key issue in the week ahead for Sterling, probably the most significant event, assuming a reaction is forthcoming.

"While GBPUSD advanced on news that UK Prime Minister Theresa May won support for her 'soft Brexit' approach to the customs union internally, the real test is whether the EU is warm to their position," says John Kicklighter chief strategist at DailyFX.com.

Beyond that, however, it is a relatively quiet week for the Pound, with the most significant data industrial and manufacturing production, and trade data for May released on Tuesday, July 10 at 8.30 GMT.

Last week the pound was supported by strong Services PMI data for June which helped dispel fears of the Q1 slowdown extending into Q2 - the big question now is whether heavy industry experienced the same recovery and if it did it will probably support Sterling.

"A strong set of figures would almost certainly give the pound another leg up," says Rafi Bouyadjuidan, an analyst at XM in his week ahead commentary.

Yet not all analysts share his view:

"The manufacturing output is unlikely to alter the view of Sterling trapped in corrective mode against the US Dollar in the week ahead," counters Mario Blascak, an analyst at FXStreet.

The other main release for the Pound is the new monthly GDP estimate (for May) out at the same time as the other data on Tuesday.

Data and Events for the Australian Dollar in the Week Ahead

One of the main data releases for the Aussie Dollar in the week ahead is the NAB Business Confidence Survey for June, which is forecast to rise to 8 from 6 previously when it is released on Tuesday, July 10 at 1.30 GMT.

Also out is the Westpac Consumer Sentiment Survey for July, scheduled for release at 00.30 on Wednesday, July 11.

A beat on either events could help AUD, however most analysts agree the currency will likely take its cue from global drivers.

"The AUD is likely to remain caught in the cross-fire of US trade policy for now. We would be less bearish on the outlook if there were strong domestic data to latch onto, but the data flow remains uninspiring from an RBA rate hike perspective. Risks around the housing market may also weigh. Favourable terms-of-trade have helped so far, but this channel seems to be steadying. We expect the AUD to continue to trade defensively," says Daniel Been, Head of FX Research with ANZ.

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