GBP/AUD Week Ahead Forecast: Pullback Could Stabilise

• GBPAUD in a short-term downtrend
• But look for support at 100-day MA
• Medium-term still GBPAUD bullish
• Bank of England, UK inflation in focus
• Second-tier survey data due out of Aus

Image © Adobe Stock

The Pound looks set to remain under near-term pressure against the Australian Dollar although the medium-term trend remains positive, according to a key momentum indicator, and the coming week could offer some brief strength owing to the Bank of England policy decision and UK inflation release.

Indeed, direction in the Pound to Australian Dollar exchange rate (GBPAUD) over the coming week will be largely dependent on the Sterling side of the equation with little data due out of China - a key driver of Aussie performance - and only second-tier survey data due from Australia itself.

GBPAUD has been undergoing a notable retracement over the August-September period that has seen a 3.75% decline from the peak at 1.9971 to current levels near 1.9230, a move tied to improved sentiment towards China and a string of robust Australian data releases.

The bigger picture, is however, one consistent with a GBPAUD uptrend and at some point over the coming days and weeks Sterling might stabilise and reboot that trend, retaking recently lost ground and making new multi-year highs.

As a rule, Pound Sterling Live, would only call a turn in trend when the pair slips below the 200-day moving average which offers a simple indicator of where the momentum lies and we have written today how the GBPUSD exchange rate has broken its 200-day MA and has entered a downtrend:

Above: GBPAUD at daily intervals with 100-day MA (red) and the 200-day MA annotated.

For now, GBPAUD remains well above this mark. As long as the conversion rate stays above the 200-day MA momentum is considered positive.

Note, that another key MA is in play - this being the 100-day - which gives an indicator of shorter-term momentum. We could see the area tested and would not be surprised if a number of orders are layered around this point.

Weakness could therefore extend to the 100-day MA this week - currently at 1.9125 - where it might stabilise, something we have seen in the last couple of days.

The Australian Dollar last week extended a winning streak against its major peers following the release of positive data out of China that suggests the worst of the country's economic downturn is behind us, a day after domestic job figures beat expectations.

China reported stronger-than-expected retail sales figures with growth coming in 4.6% year on year against the market consensus of 3.0%. Chinese industrial production printed at 4.5% y/y against 3.9% consensus and the jobless rate survey read at 5.2% against a consensus expectation of 5.3%.

This in turn feeds into China-linked commodity demand, which is significant for Australia's foreign exchange-earning raw material exports.

"Iron ore futures rallied as Chinese authorities increased efforts to support economic activity. Fresh signs have emerged that recent stimulus measures are working, with most headline economic figures from industrial production, retail sales, exports and CPI data exceeding expectations in August," says Gregorius Steven, analyst at ANZ.

Above: AUD is the best-performing major currency over a one-month timeframe.

Turning to the data calendar, China is relatively empty this week but Australia has some important second-tier economic surveys and the release of RBA minutes to keep an eye on.

Minutes from the Reserve Bank of Australia's (RBA) September meeting released Tuesday confirm the central bank is comfortable keeping interest rates unchanged, which is, on balance, a dovish development for the AUD.

In June the RBA's Board described a decision to raise rates by 25 basis points as "finely balanced".

Economists emphasise the latest minutes show the Board is more confident in the decision to hold: "in weighing up the two options, members agreed that the case to keep the cash rate target unchanged at this meeting was the stronger one."

This choice of "stronger argument" has now been used since the July meeting when the Board first went on hold.

The Westpac-ACCI Actual Composite survey revealed Tuesday that Manufacturers are facing the weakest demand conditions in a decade (outside of the pandemic shock in 2020), as well as deteriorating profitability.

The survey reading printed at relatively low levels, moving sideways in the September quarter to 51.3, following a 51.1 outcome in the previous period.

"These readings, which are around the break-even mark of 50, indicate that conditions are approaching stalling speed. The survey reported flat new orders for a second quarter, declines in employment and overtime, and a modest rise in output aided by an easing of labour and material shortages," says the report.

Wednesday sees the release of Australia's August Westpac–MI Leading Index which recovered to –0.60% in July, but remained firmly in negative territory, consistent with below-trend growth continuing through the second half of 2023 and into early 2024.

Westpac says the August update looks likely to be another soft one with some notable declines in several components, including a 14.6% drop in commodity prices (measured in AUD terms); dwelling approvals, down a further 8.1%; total hours worked down 0.5% m/m; and a minor sell-off in the ASX (down 1.4%).

"Other components look to be largely unchanged although a stabilising yield spread – now that official interest rates are on hold – should provide some offsetting support," says Westpac.

Image © Adobe Stock

The Bank of England and UK inflation data are two events that could offer some meaningful support - or otherwise - to GBP this week, thus determining whether GBPAUD can find support at that already-mentioned 100-day moving average.

The Bank looks keen to signal the end of the rate hiking cycle is close, even as it delivers another 25 basis point hike in response to elevated inflationary levels.

The risk for Pound Sterling is that it makes a hash of navigating a tricky juncture that triggers a sell-off, as was the case throughout the duration of 2022.

"Will BOE indicate a pause after hiking 25bp next week? If so, GBP should have room to drop," says Anders Eklöf, an analyst at Swedbank.

Above: "Market pricing suggesting the BoE are finally within striking distance of the terminal rate" - Deutsche Bank.

Bank of England Governor Andrew Bailey contributed to Sterling weakness when he appeared before members of Parliament's Treasury Select Committee and explicitly stated the Bank was close to reaching a peak in interest rates.

The subsequent adjustment lower in UK rates and the Pound therefore suggests much of the downside that comes from a 'dovish' turn might already be accounted for, limiting potential GBP weakness at the event itself.

Wednesday's inflation release comes ahead of the Bank's decision and it is hard to see any upside for the Pound coming from this data set.

A stronger-than-expected inflation figure (expectations: 7.1% y/y, core expected at 6.8% y/y) would normally be associated with strength in the Pound, but markets might not reward such a print if it suggests the UK's stagflation problem is more acute than previously expected.

A downside miss will also simply suggest the Bank of England can afford to relax in November, egging on the recent trend of GBP weakness.

On balance, however, the non-staglationary signal of a below-consensus print is likely more supportive of the Pound on a longer-term basis.

"The MPC's hope will be that Wednesday's CPI print doesn't now raise pricing - and thus raise the stakes for sterling - right before their decision," says Shreyas Gopal, Strategist at Deutsche Bank.