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- GBP/AUD nearing possible pivot level

- Sharp decline possible due to loudspeaker pattern

- Pound driven by Brexit votes this week

- Aussie eyes housing data

The Pound-to-Australian Dollar exchange rate is trading at 1.8456 at the start of the new week after declining a percent in the previous week, cutting back the pair's 2019 advance to 2%.

The losses suffered by the pair over recent sessions appear to have come largely from the Sterling side of the equation as opposed to independent Australian Dollar strength, with markets paring back exposure to the UK currency ahead of a key week of Brexit votes in the House of Commons.

The technical outlook is mixed at this point - whilst the pair remains in an established short-term uptrend it is vulnerable to weakness because of a ‘broadening formation’ or ‘loudspeaker’ pattern which has developed.

Loudspeaker patterns usually have 5 component waves, labeled A-E but this one only has completed 4, suggesting a wave E down could be next to unfold. There is also a risk of the exchange rate rising up, touching and being rejected by the upper borderline of the pattern. At that point, a decline back down to the base of the broadening formation in the 1.70s may be possible.

If there are further declines it is likely the pair will initially fall to an interim target at the trendline drawn from the December lows, touching a target in the 1.82s.

The four-hour chart above shows this to be likely. The pair has formed a double-top pattern at the highs and pierced right through the neckline supplying confirmation for more downside. It will now probably fall a similar distance down as its height. This suggests a move down of about the sort of magnitude which would take the exchange rate down to the level of the trendline at 1.8250.

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The Australian Dollar: What to Watch this Week

This has pressured the Australian Dollar lower as it could prompt the Reserve Bank of Australia (RBA) into cutting interest rates: lower interest rates, or expectations thereof, tend to weigh on a currency.

Market sentiment is turning bearish on this front, we reported on Friday that NAB - one of Australia's largest lenders - said it now expects the RBA to cut its interest rate twice this year, with a 25 basis point reduction of the cash rate to 1.25% coming in July and a final cut to 1% being delivered in November.

"We now think that the RBA will make two rate cuts in 2019. Growth appears to have lost significant momentum, placing at risk further improvement in the labour market at a time when inflation poses little constraint on policy and financial stability risks have abated," says Alan Oster, chief economist at NAB.

If NAB are correct we would expect the Australian Dollar to come under pressure because global currency markets are not expecting two cuts in 2019, therefore there is ample space for readjustment in the exchange rate space.

Housing will be a key decider for the RBA, and with this in mind home loan data out on Tuesday at 12.30 GMT could be of interest to investors and could have an impact on the currency.

The volume of home loans issued fell steeply by -6.1% in December but they are forecast to rise by 1.0% in January.

If they beat expectations we could see the Aussie supported, while a disappointment could see the currency come under pressure.

“The slide is expected to carry into January with industry data covering the major banks pointing to a further 2.5% decline. The value of investor loans is expected to see a similar fall. As always, the low activity over the holiday season means January reads are less reliable than usual,” says a note from Westpac Bank.

Aussie NAB business confidence out on Tuesday at 12.30 GMT is another major release for AUD in the week ahead. It is forecast to come out at 3 in February from 4 previously.

The other key data release is the Westpac consumer confidence release, out at 23.30, on Tuesday. The survey is one of the most timely releases on the calendar with data for the up-and-coming released gathered in the first week of the March. It can, therefore, be a very early indicator for the Australian economy. Since data has been quite poor recently, however, business morale is not expected to be very high.

“This month’s survey is in the field from March 4–9. The main development over the last month has been another run of weak economic data culminating in the soft December quarter national accounts showing annual GDP growth slowed to 2.3%, with press coverage emphasising the weakness of the second half of 2018. Financial markets have remained quite buoyant, the ASX up a further 3% since the last survey, but housing market conditions remained soft,” say Westpac.

The Pound this Week: It's Crunch-time

With no further concessions on the Irish backstop likely from the EU, and talks being described as being close to breaking down, Theresa May is now unlikely to present the changes required to win and the most probable scenario is that Parliament then moves to vote on whether or not to exit the union without a deal, on Wednesday.

Assuming it does not vote for this outcome - parliamentary arithmetic suggests this is highly unlikely - the next most probable outcome is that Parliament votes on Thursday to decide to request a delay of Article 50 and the whole Brexit process from the EU.

That there will be a delay is currently the consensus expectation. How this will affect Sterling is open to interpretation.

“If lawmakers choose to delay Brexit, a modest rise is attainable for the Pound, while a surprise backing of May’s deal could send the Pound surging above $1.35. But In the unlikely event that a no-deal wins support, sterling could crash below $1.27,” says Raffi Boyadijian, an economist at broker XM.com.

The Brexit deal faces a heavy defeat in parliament on Tuesday because she has so far secured no major changes from the European Union, the leaders of two major eurosceptic factions in parliament said on Sunday.

Nigel Dodds, the deputy leader of the Democratic Unionist Party (DUP) which props up May’s minority government, and Steve Baker, a leading figure in the large eurosceptic faction of her Conservative party, warned “the political situation is grim”.

“An unchanged withdrawal agreement will be defeated firmly by a sizeable proportion of Conservatives and the DUP if it is again presented to the Commons,” they wrote in the Sunday Telegraph.

In further, developments a Sunday Times report says May’s team have been warned by senior Brexiteers that she would get her deal passed only if she offered to resign by June so a new prime minister could lead the second phase of negotiations.

"We think Sterling faces a more difficult road," says James Rossiter, a foreign exchange strategist with TD Securities. "A lot of good news is already in the price and that investors may have gotten a little ahead of themselves in hoping for further positive developments. With the UK's data and event calendar relatively light until the 12th, we think Sterling may start to feel the effects of gravity once again."

The other main release is UK GDP which is forecast to show a 0.2% rise in January after a -0.4% fall in December when it is released at 9.30 GMT on Tuesday.

GDP is forecast to have risen 1.2% from a year ago, up from 1.0% previously. A higher-than-expected rise would support the Pound and vice versa for a lower-than-forecast result.

The trade balance in January is released at the same time as GDP and is forecast to show a -12.2bn deficit compared to -12.1bn previously.

Also released at the same time is manufacturing production and this is forecast to show a 0.0% rise in January month-on-month compared to the -0.7% previously.

Industrial production in January is released at the same time and estimated to have fallen by an even steeper -1.4% from -0.9% previously.

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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