Image © Greg Brave, Adobe Stock

- GBP/AUD consolidates in triangle

- Direction dependent on breakout

- Sterling to be moved by Brexit developments

- Aussie to be driven by inflation and geopolitics

The Pound-to-Australian Dollar exchange rate is trading at around 1.8797 at the start of the new week, after falling 0.71% in the week before. The exchange rate is trading sideways after enduring a multi-week rally and while the short-term outlook is neutral we believe that when the next major trend emerges it will likely be to the upside.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week - shows how the pair started going sideways after peaking at the October 16 highs.

This sideways consolidation has formed a triangle or pennant pattern. The shape of the pattern means it is difficult to predict in which direction the eventual breakout will occur.

The established trend means there is a bias to further upside since the existing trend is always favoured.

However, this is not a high-confidence call as the same time the bottom of the triangle is flat, meaning it may be a right-angled triangle, and this suggests a heightened risk of a downside break.

Another bearish indicator is the especially weak RSI momentum indicator in the bottom panel.

On balance, therefore, we remain neutral until further confirmation provides a stronger directional steer.

A break above the rising channel line at around 1.9120 would provide the greenlight for a continuation higher to a target at 1.9250.

At the same time, a break below the base of the triangle and 1.8717 would provide confirmation for a continuation down to a target at 1.8500.

If the pattern is a bull pennant then the market is showing the potential to rise up to a target at 1.9750 eventually.

The daily chart shows a clearer bull pennant pattern which could suggest a breakout higher to a target above the channel line highs at 1.9750.

A break above the channel line would be required to confirm a continuation to such a target, however, signalled by a move above 1.9300.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart shows the bigger picture of the rising channel which began at the 2017 lows.

The most recent move up within the channel has been quite steep and there is a possibility that it could breakout and go even higher to an upside target at 2.000 eventually.

Reaching the target would be conditional on a breakout of the channel, however, signalled by a move above 1.9500.

The weekly chart is used to give us an idea of the longer-term outlook, which includes the next few months.

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The Pound this Week: EU Decision on Brexit Extension Key

This was supposed to be the week the UK left the EU, instead politicians will be left strategising around a Brexit extenions, the length of which could determine whether the Government takes another crack at passing Brexit legislation or pushing for a General Election.

The Pound is however likely to remain supported in the week ahead as the chances of a ‘no-deal’ Brexit remain negligible whilst other outcomes - successful implementation of the government’s deal, a general election, and a referendum - are all relatively benign from Sterling's standpoint.

Monday could be the day the EU will announce the length of the Brexit extension, however resistance from France to a lengthy delay are making EU discussions on the matter more protracted than might be expected.

France see little reason to grant a long extension because the UK are not offering any credible reason for such a delay: recall the EU have consistently said a delay will only be considered were the UK to hold elections or a referendum.

If a long delay is agreed, to January 31, Prime Minister Boris Johnson will push hard for an election, but he needs a two-thirds majority in Parliament to do that, which would require the support of the Labour party, which is currently undecided.

Labour leader Jeremey Corbyn has expressed concern that if he supported a general election it would lead to parliament being dissolved and could open the door to the government delivering a hard-Brexit ‘by stealth’ in the interim. He says wants assurances from Johnson that a ‘no-deal’ could never happen, before giving his backing to a general election.

However, the sceptic would point to Labour's dire polling for the hesitancy.

Either way, markets have taken a bullish stance on Sterling when the odds of Johnson's deal passing rises, and it falls when those odds fall.

"We see prospects of an early election as negative for GBP given that it would tame optimism about the withdrawal agreement being reached – the key driver of GBP gains this month – and reintroduce uncertainty into Sterling," says Petr Krpata, a foreign exchange strategist at ING.

More delay and uncertainty surrounding an election are likely to on balance have a bearish impact on Sterling.

On the economic data front, the most important release is Manufacturing PMI for October out on Friday at 10.30 BST and forecast to show a fall to 48.1 from 48.3.

The PMI is a survey-based gauge of sentiment and activity in the sector under examination. The improved mood music around Brexit and global trade means there is a risk of a slightly better result lending Sterling mild support.

Expect economic releases to play second-fiddle to Brexit developments.

The Australian Dollar: What to Watch this Week

The main drivers for the Australian Dollar in the week ahead are likely to be Australian CPI data out on Wednesday, a speech by RBA governor Lowe on Tuesday and Chinese PMI data out on Thursday.

Third-quarter CPI data is forecast to show a 0.5% rise compared to the second quarter and a 1.7% yearly rise when it is released at 1.30 GMT on Wednesday.

It is important because it could influence Reserve Bank of Australia (RBA) policy on interest rates which is a major driver of the Aussie exchange rate.

If inflation comes out below-expectations it could prompt the RBA to cut base interest rates again in November which would weaken the Australian Dollar.

Lower interest rates weaken currencies because they reduce foreign capital inflows.

But since the RBA is actually quite keen to keep the Aussie Dollar weak (to encourage exports and help drive growth), there is a growing risk they will cut rates again in November.

“Continuing weak and below target inflation is consistent with our view that the RBA will undertake further monetary stimulus initially via more interest rate cuts in the months ahead,” says Dr Shane Oliver, chief economist at AMP Capital.

The U.S. Federal Reserve is almost certain to cut interest rates on Wednesday and this too could prompt a cut from the RBA in order to keep the exchange rate competitive for exporters.

“As Governor Lowe noted at the IMF: “…we have to take these shifts in global interest rates very seriously if we sought to ignore them our exchange rate would go up…[which]…would be unhelpful,” says Dr. Oliver.

RBA governor Lowe will actually deliver a speech on Tuesday at 7.45 which could reveal his intentions around the timing of the next cut, if there is one.

Chinese PMI data could also influence the Aussie when it is released at 2.00 on Thursday because trade between the two is so intertwined.

Manufacturing PMI is forecast to remain at 49.8 in October the same as it was in September.

A higher-than-expected reading should be taken as positive or bullish for the Australian Dollar, while a lower than expected reading should be taken as negative or bearish.

Hong Kong protests could also influence global risk markets and the Australian Dollar if the U.S. Senate goes ahead and votes to make a proposed Human Rights and Democracy Act law which would lead to the automatic imposition of sanctions on HK in the event of human rights or democracy abuses.

The new law has already been voted through Congress and could get a vote in the Senate as soon as next week. If it is approved it will enrage the Chinese and could sour trade relations.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here.

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