Pound Sterling-to-Australian Dollar Forecast: Decline Tipped to Extend

Image © A. Strode, Adobe Stock

- GBP/AUD continues steady decline

- Possible broadening formation a bearish sign

- Pound to be driven by wage data; Aussie by China GDP

The Pound is stuck in a technical downtrend against the Australian Dollar which is expected to extend. UK employment data and broader investor sentiment will be the factors traders will be eyeing over coming days.

The Pound-to-Australian Dollar rate is trading at 1.8209 at the start of the new week, over 0.7% lower than the week before and 3.0% lower over the course of the past month.

The Australian Dollar outperformed the Pound in the previous week as the Reserve Bank of Australia (RBA) shifted its stance on interest rates after the deputy governor made a speech dismissing ingrained expectations its next move would be to cut rates while better-than-forecast Chinese data on Friday extended the strength.

The Aussie was also supported by easing global growth fears and a better outlook for negotiations between the U.S. and China which affect it via its close trade ties with the latter.

The Pound, meanwhile, had the wind knocked out of its sails by news Brexit would be delayed until October 31.

Our technicals studies of the GBP/AUD exchange rate suggest the broader outlook favours a continuation of the decline.

The pair has been forming what is probably a bearish broadening formation (also known as a loudspeaker pattern) ever since the beginning of 2018.

Broadening formations are usually composed of 5 waves, labeled A-E, and the pattern on GBP/AUD appears to have completed 4 waves so far. This suggests the next wave could be a wave E down. Such a move might take the pair all the way down to the borderline at around 1.7200.

Looking more closely at recent activity and we note how the exchange rate has now successfully broken out below the lower channel line of a rising channel; last week’s bearish candle (circled) confirms the break.

The pair has almost reached the next downside target in the process, at 1.8175 and the level of the 200-week moving average (MA).

It will probably continue falling until it hits it and possible maybe even lower since usually prices move at least two-thirds the width of the channel they have just broken out of, extrapolated to the downside. This suggests GBP/AUD may fall all the way to 1.8010 as this corresponds to the full height of the channel extrapolated lower (x).

Momentum is extremely bearish as it has both fallen in line with the exchange rate, and has fallen to a relatively low level compared to the past. When it troughed at the same time as the market in February the exchange rate was lower than it is now. This could signal more downside still to come.

It is quite possible that assuming our broadening formation hypothesis is correct the pair will eventually fall all the way to the lows of the pattern in the early 1.70s.

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The Australian Dollar: What to Watch this Week

Global investor sentiment remains the primary driver of Australian Dollar performance, with the currency tending to appreciate when investors are in the mood to buy stocks, commodities and other high-return financial products.

This mood often tends to be linked to the fortunes and outlook for the Chinese economy, Australia's largest export destination. The general rule-of-thumb to subscribe to is that when China is doing well, the Aussie economy will do well too.

"Chinese economic data provided a welcome surprise with exports rising by 14.2% y/y in March, even as imports were weaker falling by 7.6% y/y. Much of this improvement was probably still a degree of catch-up from very weak January data, but nonetheless it helped the mood which is already lifting as a result of optimism over the trade talks," says Timothy Fox, Head of Research & Chief Economist at Emirates NBD.

The most significant release for the Australian Dollar is therefore probably Chinese Q1 GDP data on Wednesday, April 17, at 3.00 BST, because China is Australia’s largest trade neighbour and so changes in the Chinese economy affect demand for Aussie exports and, therefore, the Australian Dollar exchange rate.

The data is expected to show a slightly slower 1.4% pace to Chinese growth in Q1, after growth of 1.5% in Q4.

There is a risk it could surprise to the upside, however, as recent better-than-expected Chinese trade figures, could mean the GDP is better-than-expected and this could, in turn, support the Aussie.

“Given policymakers’ focus on global growth, without doubt, the official release of China’s Q1 GDP growth (Wed) will be watched with interest,” says Henry Occleston, an analyst at Lloyds banking group. “It is forecast to be marginally weaker than prior, though with positive sounds from the IMF, and the stronger than expected trade data we saw this week, it could surprise on the upside.”

Apart from Chinese data, the other key release in the week ahead is likely to be labour market data out on Thursday at 1.30.

It is expected to show the unemployment rate rising back up to 5.0% in March from 4.9% previously. This would still mean it was at a historic decade low for the metric.

The data is expected to show employment rising by 12k although the difference between full and part-time jobs could be the key, and full-time jobs tend to be more indicative of an improvement in the underlying economy than part-time jobs.

The labour market is the bright spot in the Australian economy and is the reason why RBA’s deputy governor, Guy Debelle, was more optimistic about the impact of the housing slowdown, when he gave a recent speech. He said the data showed even people in negative equity were coping because they had jobs to go to and could, therefore, continue paying their mortgages.

“The critical factor in the future evolution of both arrears and negative equity is whether the household with the mortgage has an income and a job. The labour market is key here,” said Debelle in a speech to the American Chamber of Commerce in Adelaide.

The Pound: What to Watch this Week

With the deadline for exiting the EU now having been delayed Brexit will probably be less of a driving force for the Pound in the short-term. Bear in mind parliamentarians are also on their Easter break, therefore headlines should fade in frequency for this politically-charged currency.

Instead, hard data will become a more important driver again, and the highlight will likely be UK labour market data out on Tuesday, April 16, at 9.30 BST.

Of the various labour market stats which will be released average wages will be the most important.

Average earnings are expected to show a 3.4% rise in February compared to the 3.4% previously, and wages including bonuses, a 3.5% rise. Forecasts are quite high and if the actual figures are even higher it would almost certainly give a lift to the Pound.

The Bank of England is keeping a close eye on wages and have suggested they could raise interest rates in 2019 should wage rises continue to be robust. And, expectations for higher interest rates at the central bank tends to be a positive driver of Sterling.

"We are anticipating that average earnings will show a pick-up in the headline rate of income growth in the 3 months to February to 3.6%y/y while regular pay rises by 3.4%. This would reflect the tightness that we continue to see in the labour market amid ongoing delayed corporate investment spending," says Henry Occleston at Lloyds Bank Commercial Banking.

Jobs are forecast to have increased by 180k 3 months-on-3 months in January from 220k in the December, and expectations are the unemployment rate remained at 3.9%. The unemployment allowance claimant count is forecast to be 20k in March from 27k in February.

If wage data is strong it is expected to warn of better retail sales data when it is released on Thursday at 9.30 BST given the close relationship between the two.

Current forecasts are for retail sales to show a -0.3% fall in March from 0.4% in February and a 4.6% rise year-on-year.

The other main release for the Pound is inflation data for March out mid-week, which is forecast to show a 0.3% rise compared to the 0.5% increase previously, and a 2.0% rise compared to a year ago.

Higher inflation tends to drive up Sterling since it usually results in the Bank of England (BOE) having to raise interest rates, and higher interest rates tend to attract higher foreign capital inflows.

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