- GBP/AUD starts week on firm footing

- Trend remains positive for Sterling

- But AUD to outperform if markets, commodities continue rising

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GBP/AUD spot rate at time of writing: 1.8284Bank transfer rates (indicative guide): 1.7641-1.7769FX specialist provider rates (indicative): 1.7850-1.8116For more information on FX specialist rates, please see herePound Sterling remains poised to trend higher against the Australian Dollar according to an observation of the technical conditions in the market, however the Australian Dollar's ongoing fundamental support from rising equity markets and commodity prices suggests upside momentum in the GBP/AUD exchange rate could be difficult to sustain.

The Pound-Australian Dollar exchange rate starts the new week higher at 1.8252, adding to a 0.35% advance booked on Friday, August 07.

While the exchange rate recorded a 0.46% loss for the week, the declines were by no means deep enough to reverse the 1.74% advance of the week prior suggesting something of a 'shallow dip' in the market that technical traders would suggest is indicative that the bulls, by and large, remain in charge.

Trading Central - an independent technical analysis provider - says, "the upside prevails as long as 1.7987 is support."

1.7987 is therefore an important level to watch out for, as only a break below here would invalidate the pro-Sterling view for this exchange rate with such a development opening the door to declines to supports at 1.7627 and then potentially 1.7413.

However, as the exchange rate remains above 1.798 the bullish bias remains intact; "the RSI is above 50. The MACD is positive and above its signal line. The configuration is positive," says Trading Central.

Furthermore, analysis shows the exchange rate to be above its 20 and 50 moving averages, located at 1.8066 and 1.8124 respectively.

Trading Central are targeting a rally in GBP/AUD to 1.8818 and then 1.9034 under the current market configuration.

Above: GBP/AUD weekly chart, with a key pivot level (red) and potential targets (purple).

Sterling has been a dominant factor in the GBP/AUD exchange rate's increasingly robust profile: if we look at the above we can note the market had been in a sharp and clear downtrend until late June, a point at which consolidation set in and gains soon ensued.

There are a number of drivers behind the Pound's improvement, particular a growing assumption by the market that an agreement on a Brexit trade deal would be more likely than not. Indeed, we report this morning that the assumed odds of a 'no trade deal' outcome has fallen to 25% from 30% previously at investment bank Morgan Stanley.

"There are positives: media reports suggest the EU is contemplating easing some of the level playing field demands; and the negotiators have now agreed to further talks," says Economist Jacob Nell at Morgan Stanley. "Given incentives to avoid a bad outcome, we expect a deal on goods in the end."

Furthermore, a lingering fear amongst foreign exchange market participants that the Bank of England is seriously considering slashing interest rates to 0% or even lower, appears to have lifted courtesy of the Bank of England's latest policy update, out last week.

It is the view of the Bank that the UK economic recovery is progressing at a level that warrants interest rates and quantitative easing remaining at current levels, however there do remain significant downside risks to the outlook.

"An outright negative view on Sterling would require a more bearish macro backdrop," says Zach Pandl, Senior Economist at Goldman Sachs.

Despite Sterling's improved fundamental outlook, it must be emphasised that the Australian Dollar retains a bullish feel and was in fact the best performing major currency of the previous week.

The key point to note on the performance of the Australian Dollar is the supportive global environment, and by this I mean investor sentiment as reflected in stock and commodity prices.

Stocks continue their robust trading performance and given the Aussie Dollar has the highest positive correlation to this asset class of the G10 it should come as no surprise that it rose last week in sympathy with the broader trend in markets.

Commodity market dynamics are also outright supportive with iron ore prices last week rising to their highest level in two years on the back of solid demand out of China, where infrastructure spending is being ramped up in response to both new post-pandemic stimulus measures as well as the need to repair infrastructure damaged by this summer's floods.

The need to invest in infrastructure will likely be raised owing to the damage wrought by Typhoon Hagupit earlier this week.

Iron ore prices reached $846 a tonne according to pricing on IG, with the rise being driven not only by strong demand but also a drop in output from Brazil, allowing Australia's iron ore exporters to take additional market share. Iron is Australia's main export and foreign exchange earner, therefore higher prices and strong demand from China are providing a fundamental support to the Aussie Dollar.

And then there is gold, which reached record highs this week at $2074 / ounce, which should only add to the country's growing trade balance.

"Australia is the third largest gold producer after China and Russia. We estimate that gold is now Australia’s fourth largest export. Given the importance, the elevated gold price is a positive for AUD/USD," says Kim Mundy, a strategist at Commonwealth Bank of Australia.

With the Australian Dollar enjoying a strong fundamental underpinning we would expect any further upside in GBP/AUD - as discussed in the technical picture earlier in this article - to be hard to come by unless the global backdrop deteriorates over coming days.