More Downside Expected After Break Below 2018 Trendline

Image © A. Strode, Adobe Stock

- Break below key trendline a negative sign for pair

- More downside potential to 200-day MA

- Leadership race key for Pound; Capex data for AUD

The Pound / Australian Dollar exchange rate is trading at 1.8369 at the time of writing having fallen almost a percent from a week ago.

Ever since the start of May, the pair has been in a short-term downtrend and following the old adage that “the trend is your friend” this downtrend is biased to continue.

GBP/AUD has now also pierced below a major trendline drawn from the 2018 December lows, and this adds further conviction to our bearish forecast. We now expect the pair to probably continue lower towards a target at 1.8150, subject to a confirmatory break below the 1.8299 lows.

This target is at the level of the 200-day moving average (MA) and the April lows both of which are expected to offer a hard floor of support.

Eventually, it is quite possible the pair could break below these levels too. The weekly chart shows how the pair appears to have been forming a bearish chart pattern called a broadening formation (BF).

These appear when the market range widens due to heightened volatility. The BF is normally composed of five waves, labeled A-E, and this pattern is probably currently unwinding lower in wave E, which could go all the way down to the lower 1.70s eventually.

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The Australian Dollar: What to Watch this Week

There may be a greater focus on Australian data in the week ahead as we near the June 4 meeting of the Reserve Bank of Australia (RBA) and analysts weigh up whether or not to expect an interest rate cut from the RBA.

Currently, bets are tilting in favour of a cut after RBA Governor Philip Lowe gave his strongest indication yet that they would cut saying the Bank “will consider the case” for a rate cut at the coming meeting.

Lower interest rates tend to depreciate a currency as they reduce net foreign capital inflows, therefore, if the data is bad and the RBA feels forced to cut rates, the Aussie will fall.

“As the Reserve Bank of Australia’s next policy meeting nears on June 4, traders will be looking for further confirmation from upcoming releases that the central bank will cut rates at that meeting,” says Raffi Boyadijian, an economist as broker XM.com.

Of the data out in the week ahead, capital expenditure data, out at 2.30 BST on Thursday, May 30, will probably be the most important coming release, as it impacts on GDP expectations the most and these along with inflation impact on RBA decision-making.

Housing data will also be closely watched because of the poor state of the Australian housing market. New home sales are out on Wednesday, May 28th, and building approvals are out on May 30. Housing credit and private sector credit are out on Friday.

PMI figures for China could also impact on the Aussie as the two economies have close trade ties. Any weakness in Chinese manufacturing PMIs, out on Friday at 3.00, would have a negative impact on AUD and on “the market mood at a time when the global outlook is already deteriorating from a worsening trade war,” according to Boyadijian.

The Pound: Data-Light Week, Politics to Dominate

The main focus for the Pound over the coming week will be political, as the European Union election results are published and likely to show the ruling Conservative Party as having suffered a considerable defeat.

Out of 64 MEPs declared so far, Nigel Farage's Brexit Party has won 28, the Liberal Democrats 15, Labour 10, Greens seven, the Conservatives three and Plaid Cymru one.

"With a big, simple message - which is we've been badly let down by two parties who have broken their promises - we have topped the poll in a fairly dramatic style," says Farage on the BBC's Radio 4. "The two party system now serves nothing but itself. I think they are an obstruction to the modernising of politics, and we are going to take them on."

The extent of the defeat suffered by the Conservatives is sizeable and could be important as it may impact decision-making by party members as to who would be the most suitable replacement for Prime Minister Theresa May who resigned last week.

The worse the defeat the more likely the party will choose a potential leader with broad appeal such as Boris Johnson. Johnson is a Brexiteer who has said that if he were PM, we would be leaving the EU on October 31 “with or without a deal”.

The exact line-up of potential candidates will probably be announced within the next week and the selection and their potential impact on Brexit is likely to affect the Pound. Current contenders include Boris Johnson, Andrea Leadsom, Dominic Raab, and Michael Gove, all of which are considered Brexiteers. Jeremy Hunt is the leading remain voting contender, but even he describes himself as a 'born again' Brexiter.

The EU said it has not changed its stance on Brexit after May’s resignation, and that “our position on the withdrawal agreement - there is no change to that,” according to EU spokesperson Mina Andreeva.

A summer of political intrigue lies ahead, and the uncertainty should keep Sterling under pressure.

On the hard data front, the week ahead is expected to be relatively uneventful.

Consumer Confidence is probably the most important release, and is forecast to show a moderation to -12 in May from -13 previously, when it is released at 00.01 B.S.T. on Friday, May 25.

The inflation report hearings on Tuesday morning could also impact the Pound as Mark Carney, the governor of the Bank of England (BOE) and several Monetary Policy Committee members testify on the inflation and economic outlooks before Parliament's Treasury Committee, however, much of what they say will be highly conditional on the outcome of Brexit.

Housing data is highlighted, with mortgage approvals out on Tuesday at 9.30 and the Nationwide house price index is out on Friday at 7.00.

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.

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