Recovery Extends into New Week

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- GBP/AUD showing short-term reversal signs

- But overarching downtrend suggests bearish risks

- Pound to be moved by GDP data; Aussie by central bank meeting

The Pound-to-Australian Dollar exchange rate is trading at around 1.7929 at the time of writing on Monday, with a short-term recovery apparently extending into the new week.

The pair has rebounded since piercing below a major trendline and may have reversed trend, but at the same time the overarching downtrend may also still arguably be intact.

We retain a neutral outlook over the next 5 days, with a confirmatory break higher or lower required to establish a new directional trend.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair in the process of pulling back higher after having broken below a major trendline and plumbed new lows on July 30.

The pull-back consists of 3 sets of higher highs (HH) and higher lows (HL) - a sign that it could be the start of a new uptrend. A break above the previous peak at 1.7985 would provide more concrete confirmation the pair had reversed trend and suggest a move up to a target at 1.8050, with progress above likely difficult due to tough chart resistance.

At the same time the longer-term downtrend could still be intact, and a break below the July 30 lows at 1.7560 would reaffirm the downtrend and suggests more downside to a target at 1.7400.

The daily chart - used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead - shows a break lower would lead to a probable move down to the next major support level at the December 2018 lows whilst a break higher could see the pair rise up to 1.8200 in the medium-term.

The 50 and 200 day moving averages (MAs) at 1.8048 and 1.8128 respectively are likely to resist further upside in the bullish case. Major MAs are not just long-term equilibrium levels or indicators of trend but also dynamic support and resistance levels in and of themselves.

At the same time the dominance of the downtrend cannot be ignored with a potential downside target at 1.7210 dependent on a break below the 1.7560 lows.

The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows the pair in a long-term rising channel.

The recent break below the major trendline suggests the possibility of a breakout lower on the horizon. Such a break would target 1.7000 equal to the height of the channel extrapolated lower by 61.8%.

Alternatively an upside move within the channel is also possible. The bullish Japanese hammer candlestick which has formed on the weekly chart is a sign supporting the case for more upside to a longer-term target at 1.8500.

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The Australian Dollar: RBA Meet Dominates Week Ahead

A policy meeting of the Reserve Bank of Australia (RBA) on Tuesday, August 6, at 05.30 BST, is probably the next major release for the Australian Dollar, although Chinese trade data could also impact. The release of the RBA’s economic projections on Friday is also likely to be a decisive event for the currency.

The RBA is tasked with setting base interest rates in Australia which it can cut or raise depending on whether it wants to support or cool down the economy in accordance with its mandate to maintain price stability.

The level of interest rates impacts on the Australian Dollar because higher interest rates tend to attract more capital inflows which boosts demand for the currency. The opposite is true of lower interest rates which reduce inflows and weaken the Aussie.

A recent slowdown in the Australian economy has led the RBA to make two consecutive 0.25% cuts. It is not expected to cut rates at the meeting on Tuesday but rather to pause to take stock of how cuts are impacting on the economy.

The decision as to whether the RBA makes a third cut could be the issue which moves markets. If the RBA governor or the statement makes reference to another cut in the pipeline the Aussie will probably weaken.

The RBA’s economic projections and written statement are published on Friday at 2.30 and these could influence whether the market thinks they will make another rate cut or not, so could also move markets.

“After cutting rates by 0.25% in each of the past two meetings, the RBA is expected to stay on hold in August as it monitors how the two cuts are supporting the economy as well as what kind of a boost the recently announced tax cuts are having,” says Rafii Boyadijian, an economist at FX broker XM.com. “But with markets anticipating one more cut before the year end, it will be important to see whether the RBA will commit itself to further cuts and that could depend on what the bank’s latest economic projections will show when the Monetary Policy Statement is published on Friday.”

The other main driver of the Aussie in the coming week could me Chinese data given the close trading relationship between the two countries.

The Australian Dollar has been dubbed a proxy for the Yuan since it is so sensitive to Chinese data and the state of the Chinese economy.

The Chinese trade balance is forecast to show a 44.2bn surplus in July when it is released on Thursday at 4.00 versus the 51bn in June. This would be in line with expectations of dwindling trade as the trade war with the U.S. bites.

A further risk factor for Chinese trade and the Australian Dollar is the threat of the U.S. imposing further trade tariffs on the $300bn of Chinese imports which have not so far been tariffed, as was threatened by Donald Trump in tweets last week when trade talks between the superpowers hit a roadblock.

The Pound this Week: Brexit, GDP and PMI Data

Sterling retains a negative bias largely thanks to markets rapidly ramping up their expectations for a 'no deal' Brexit outcome on October 31 in response to the more robust approach adopted on the matter by the new administration of Boris Johnson.

Add to this growing expectations for a snap General Election before 2019 is out, and Sterling is seen to be facing an unprecedented cocktail of political uncertainties.

"The past week has witnessed some notable market movements, most visible of which has been the sharp fall in sterling which has seen the pound fall to levels last seen in 2017 against both the USD and the euro; GBP:USD hit a low of $1.2080 and GBP:EUR 1.0950 (€:£ 0.919). Growing concerns over the possibility of a no deal Brexit have been the predominant force behind the moves," says Ryan Djajasaputra, an analyst with Investec.

We are however wary that much of the news might already be 'in the price' of Sterling at this point, and wonder whether this theme can continue playing out unless some substantial political developments occur.

With much of the political class on their summer holidays, it could be that the issue dies down for some time.

However, noting the solid trend in Sterling we are wary of fighting the trend at this point.

"Looking to the forthcoming week there are no scheduled events which could shape Brexit sentiment given Parliament is in recess, but given the market sensitivity to Brexit we would be mindful of any comments which could come from government ministers or indeed other Tory MPs," says Djajasaputra.

The main economic release on the horizon for the Pound is GDP data for the second quarter of 2019.

The average forecast amongst economists is for growth to slow to 0.0% in Q2 from 0.5% in Q1, as Brexit risks weigh and based on already-released data for the quarter.

The 0.5% rise in Q1 was surprisingly strong but this was because businesses brought forward activity ahead of the original Brexit deadline on March 29 - this will not be the case for Q2, says American bank Wells Fargo.

Over the last 3 months leading indicators, industrial production and manufacturing production have also all softened, suggested growth was lacklustre in Q2.

The data is scheduled for release at 9.30 BST on Friday, August

“Growth in the British economy is forecast to have ground to a halt in the three months to June, slowing from the prior 0.5% rate. There’s a greater risk, however, of the data missing the forecasts than beating them given the heightened Brexit and political uncertainty during the period so a small contraction in Q2 wouldn’t be totally surprising,” says Raffi Boyadijian, an economist at FX broker XM.com.

If the data is worse-than-expected and shows a contraction into negative territory the Pound could decline, and vice-versa if it is better-than-expected.

The other main market-moving release is Services PMI out on Monday at 9.30.

This is important because services is the largest sector in the UK economy and PMI’s are leading indicators which means they tend to provide an early indication of the hard economic growth data which follows.

Currently, the average forecast for Services PMI is that it rises to 50.4 in July from 50.2 in the previous month of June.

A better-than-expected reading would help Sterling and vice-versa for a miss.

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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