Bullish Inversion Starts New Uptrend

Image © Greg Brave, Adobe Stock

- GBP/AUD rallies in June beginning new uptrend

- Long-term chart is less clearcut

- Pound to be driven mainly by Brexit fears; Aussie by Global risk trends

The Pound-to-Australian Dollar rate is trading at around 1.8328 at the start of the new week, ensuring a new uptrend has taken root this June and studies of the charts suggest this will extend in the next five days.

The 4-hour chart shows how the pair has started a new uptrend since the beginning of June, with an ascending sequence of rising peaks and troughs.

Given the old adage that the ‘trend is your friend’ this new uptrend is expected to continue rising, and we see a break above the recent 1.8423 highs providing confirmation for an extension higher to a target at 1.8500.

1.8500 is a major round number where traders are more likely to close their bullish bets and take profit. The increase in supply at that level will probably lead the exchange rate to stall and possibly even pull-back making it a useful initial target.

The 4-hour chart is used to analyse the short-term trend, which means the next 5 days of trading.

The daily chart meanwhile shows how the exchange rate has closed above the 50-day MA on the last day of last week. This is a bullish sign for the pair. Normally major MAs cap upside progress, yet in this case the pair successfully pierced - and not just pierced - also closed above the MA, a sign it has been definitively breached opening the door to more upside.

We see a good chance the pair will continue up to a target at 1.8600 in the medium-term conditional on a break above the June 20 highs at 1.8223.

The medium-term is the period we use the daily chart to analyse, which is defined as the next week to a month ahead.

The weekly chart however betrays a mixed outlook. If the medium-term rally unfolds as expected it should result in a continuation up to 1.9000 in the long-term.

However, there is also a risk the pair could capitulate and break down to 1.7000.

This is because GBP/AUD may have formed a broadening formation (BF) which is a bearish price pattern.

BF’s are normally composed of 5 waves, labeled A-E and the next bearish wave down is likely to be a wave E.

Although the pair has bounced off support from both the 50 and 200 week MAs over the last few weeks it could still resume its descent, down to a target at 1.7000 at the bottom of the BF.

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

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

* Advertisement

The Australian Dollar: What to Watch

The main fundamental drivers of the Australian Dollar are likely to be commentary from Reserve Bank of Australia (RBA) officials and global risk appetite - especially as impacted by the G20 trade summit, which starts on Friday, June 28.

The Australia Dollar was one of the better performing major currencies at the start of the new week following comments from RBA Governor Philip Lowe at a panel discussion in Canberra.

Lowe said it is “legitimate to ask how effective more easing would be”, adding the government can also support the economy: “The Australian government could use low rates to finance infrastructure”.

The market's interpretation is that the comments are indicative that the RBA won't rush into another interest rate cut anytime soon, which is a positive development for the Aussie as much of the recent weakness in the currency has been as a result of growing market expectations for an interest rate cut. The RBA cut the base rate by 0.25% at their June meeting, taking the official cash rate (OCR) down from 1.50% to 1.25% - a record low.

The Aussie lost even more ground after the minutes of the RBA June meeting, published on June 18, revealed central bank officials had entertained the possibility of not just one but a series of cuts.

Lower interest rates are negative for a currency as they reduce net foreign capital inflows because of the lower interest returns on offer.

The G20 summit at the end of the week could also impact the Aussie since it is expected to provide a forum for large economies to discuss trade.

"A downside risk for AUD, particularly AUD/JPY, is failure of Presidents Trump and Xi to agree at least a temporary truce in their ongoing disagreements over trade ahead of the Thursday‑Friday G‑20 meeting," says Joseph Capurso, a currency strategist with Commonwealth Bank of Australia.

The Aussie is sensitive to the welfare of the Chinese economy, its largest trading neighbour, so if there are signs of a detente in its trade war with the U.S. it could support the Aussie.

The current consensus expectation, however, is for the two sides to reaffirm a commitment to further talks.

"All eyes on the Xi-Trump meeting at G20. Most seem to expect an agreement to start talking again, and at best, an indefinite delay on the next tranche of tariffs (the public comment period on those ends next Monday)," says Elsa Lignos, a foreign exchange strategist with RBC Capital Markets.

China has clear red lines, making a full trade deal with the U.S. unlikely in the near term.

The first is the removal of all tariffs - something the U.S. is dead against.

The second is for U.S. expectations of Chinese purchase of U.S. exports to be “realistic”.

The third is that China will not submit to intrusions on ‘national sovereignty’, which relates to the requirement from the U.S. that it enshrines the trade agreement in domestic Chinese law.

A further cause for concern is the current sabre rattling between the U.S. and Iran in the Gulf of Hormuz after a U.S drone was shot down by the Iranians.

If the conflict escalates it could increase risk aversion, which would weigh on the Australian Dollar.

The Pound: What to Watch

The leadership race may take a back seat as a Sterling driver in the coming week as the two remaining candidates Boris Johnson and Jeremy Hunt will be busy campaigning around the country, and the final results are not expected until July 22.

Johnson is the front-runner by a large margin and bar any major revelations which would make him unsuitable for the job he is likely to win the race and become the next Prime Minister.

Any details on Johnson's Brexit strategy could prove to be important for near-term Sterling direction.

Part of the reason Sterling has weakened over recent weeks is the growing likelihood this will be the case: Johnson is a hard-Brexiteer who could potentially take the UK out of the EU without a deal. However, such a strategy could almost certainly a handful of defections by Conservative MPs opposed to 'no deal', which would ultimately see the Government unable to govern, in turn inviting a General Election.

A General Election taking place over coming months is another source of uncertainty that should see Sterling remain under pressure.

Sterling has also fallen on the so-far unyielding response of EU officials to hints Johnson wants to renegotiate. This has increased the chances of a stalemate and the UK simply flopping out without a deal on October 31.

Another possible factor which could impact on the Pound is the inflation report hearing on Wednesday, June 26.

This involves the Governor of the Bank of England (BOE) Mark Carney and other BOE officials taking questions from the Parliamentary treasury select committee on the outlook for inflation and the economy.

Although most of their answers will be highly conditional on what sort of Brexit the UK has, they could still impact the Pound.

The BOE uses inflation and other economic data to decide on the level at which to set interest rates, and these have a direct influence on the Pound.

If growth and inflation rise the BOE tend to put up interest rates which appreciates the Pound. Higher interest rates attract greater inflows of foreign capital and vice versa for lower interest rates.

The second estimate of Q1 GDP is forecast to show growth unchanged at 1.8% year-on-year (yoy) and 0.5% (mom) when it is released on Friday on 9.30 BST. Only a revision would impact Sterling.

Other data out in the week ahead is the current account and business investment, which are both scheduled for release at the same time as GDP; and gross mortgage approvals, out at 9.30 on Wednesday.

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

* Advertisement

Comments are closed.