Our technical studies of GBP/AUD suggest further upside is possible in the week to come.
In just over three weeks the Pound has appreciated an incredible seven cents against the Australian Dollar; despite the Aussie showing some decent strength elsewhere in the FX markets.
At the start of January one Pound could buy you just under 1.71 Australian Dollars – at the end of last week, it could buy you roughly 1.78.
It seems the Pound is in a strong short-term uptrend against the Aussie and we see no signs of that ending yet, in fact, the shape of the market over the last six months suggests, that if anything, the exchange rate is more likely to rise up higher to 1.8000, than fall.
We see a high probability of pair retouching the December 11 highs and forecast a continuation of the uptrend up to 1.8000 on the condition of a break above the 1.7858 highs.
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Data and Events for the Australian Dollar
Most of the action for the Australian Dollar is expected to happen on Tuesday, February 6, when the Reserve Bank of Australia (RBA) announce their interest rate decision.
Interest rates have a profound effect on currencies as higher rates lead currencies to appreciate due to greater inflows of foreign capital drawn by the promise of higher returns.
Whilst the RBA is not expected to increase rates on Tuesday what they say in their statement may be significant in shaping expectations about future policy moves, and this could still impact significantly on the AUD.
A rise in interest rates this year appears to be the consensus expectation according to Canadian investment bank TD Securities.
“New Bloomberg RBA poll says median is for no hike this year but is a little misleading. Out of 22 respondents, 1 for cuts to 1%, another 10/22 for on hold at 1.50%, 4 for +25bp to 1.75% and the remaining 7 looking for +50bp this year to 2%, so the tail is actually hawkish,” says TD.
Higher growth and inflation caused by a strong labour market and rising demand for commodities – which Australia is particularly rich in – appear to be the twin drivers for expecting higher interest rates.
The trade balance is also scheduled for release on Tuesday with a 0.25bn surplus expected from a -0.628bn deficit in the previous month of November. A rise in the surplus is a positive sign for AUD as it suggests demand for exports outweighing imports, and therefore demand for AUD to purchase exports outweighing demand for other currencies to purchase imports.
Data and Events to Watch for the Pound
The main event in the week ahead for the Pound is the Bank of England (BOE) rate meeting on Thursday, Feb 8 at 12.00 GMT.
Analysts do not expect a change in interest rates so the focus instead will be on attempting to guess when the next change will come by analysing voting patterns, the wording of the statement and governor Carney’s verbal responses to questions in the press conference after.
If the evidence points to a rate rise getting more likely then the Pound will rise; if not then it will fall.
Brexit risks continue to cause uncertainty about the outlook and weigh on the BOE’s reaction function, and given those risks have not changed substantially, little change is expected, and possibly a muted response from Sterling.
The other main event is the release of the BOE’s Quarterly Inflation Report at the same times as the BOE meeting, and given inflation is one of the main factors which lead to higher interest rates, and interest rates are positively correlated to the Pound this too could impact on Sterling.
If economic growth and inflation forecasts are revised higher expect Sterling to catch a bid.
“We have long-argued that interest rates would rise somewhat faster, and sooner than markets expecting. Recent comments by Governor Carney offer tentative support to this view and suggest that February’s Inflation Report could strike a more hawkish tone than is anticipated,” says Paul Hollingsworth economist at Capital Economics.
Inflation is currently 3.0% and has been caused mainly by the depreciation of Sterling since the EU vote in June 2016. The BoE has said it is willing to allow inflation to overshoot for a limited period before tackling it, however, Hollingsworth thinks they may start to show an impatience, given the stronger-than-expected performance of the economy. Such a change would be expected to lead to a modest rise in Sterling.
Other significant data in the coming week include the services sector PMI out on Monday at 9.30 and Halifax house price data for January out at 8.30 on Tuesday. Industrial, manufacturing and trade data round off the week.
Markets are expecting a reading of 54.3 from Monday’s service sector PMI – anything better will likely set Sterling on a strong footing at the start of the new week, while disappointment could add to the bearish tone.
“While most of the early data was suggesting we could see the services sector run flat, the weak prints on both the manufacturing and construction PMIs last week now points to the Services PMI declining from 54.2 to 53.2, versus a consensus of 54.0, though we suspect that may likely drift lower by the time of release. The January PMI so far suggest the adjustment in the housing sector persisted into January while more of the demand was coming from external sources rather than domestic, all suggesting no reason the Services PMI should outperform the softer January data,” says a note on the matter from TD Securities.
The Halifax data may garner interest because last week’s Nationwide data showed an unexpected surge in house prices in January, which lifted Sterling, and the market will be looking to the Halifax data to corroborate it.
Friday, meanwhile, sees the release of manufacturing and industrial production and the trade balance for December, all out at 9.30.
Markets are eyeing monthly industrial production to have slid 0.9% in December with the manufacturing production number showing an increase of 1.2%.
Trade data should show a balance of -£11.60BN as the UK continues to import more than it exports.
With regards to the above, the manufacturing data is expected to have the most impact on Sterling.