- GBP/AUD technicals advocate downside

- Sterling upset by weekend trade comments from Javid

- Aussie outlook dominated by labour market stats

- Sterling eyes flash PMIs out on Friday

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- GBP/AUD Spot rate: 1.8871, -0.15%

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The Pound-to-Australian Dollar exchange rate edges lower at the start of the week, in line with a broadly weaker Sterling and technical conditions that advocate for further weakness in the near-term, however some key data release out of both Australia and the UK this week could shake the market.

The exchange rate has fallen back to 1.8868, as last week's lacklustre rally in Sterling is overturned, and GBP/AUD now looks prone to extending recent weakness to the 1.8650 December 23 low.

The trend has been for further weakness since GBP/AUD topped out at multi-month highs at 1.9523 on December 16, and there is little technical evidence to argue against the move lower ending anytime soon:

The near-term trend, that would dictate movement over the course of the coming week on balance favours the Australian Dollar, however the market could well surprise us and deliver some interesting moves if some key data releases surprise.

While a softer Sterling is massaging GBP/AUD lower, we do not see the prospect of a sharp and sustained fall in GBP/AUD, for now at least.

While the Pound is weighed down by expectations for an interest rate cut at the Bank of England, the Australian Dollar investors have a similar consideration to navigate when it comes to the Reserve Bank of Australia.

"We expect the RBA will deliver more policy stimulus with a 25bp rate cut on 4 February. Australian futures are pricing a 55% chance of a cut," says Joseph Capurso, a strategist at Commonwealth Bank of Australia.

Capurso says key for the Australian Dollar this week will be Thursday's labour market statistics; a disappointing set of numbers here could push up RBA rate cut expectations and add to downside pressure on the Aussie Dollar.

CBA estimate employment rose by 20,000; enough to keep the unemployment rate at 5.2%.

"A 'high' unemployment rate above 5% will reinforce the view that further stimulus is required to push unemployment towards the RBA’s 4.5% full employment target," says Capurso.

Following the strong retail sales report for November, released on January 10, the market reduced its view of the probability of an RBA rate cut in February to around 40%, and the Australian Dollar found some strength as a result.

However, upside in the currency has been capped after rate rise expectations creeping back above 50% since, "in part due to speculation that November sales were exaggerated by the growth of Black Friday retail activity," says David Plank, Head of Australian Economics at ANZ Bank.

Looking ahead, Plank says the December employment report could be the key to whether the RBA cuts in February.

"A gain of 10k or less for the month would confirm a sharp slowing in employment growth since Q2 and Q3 last year," says Plank. "While employment is a lagging indicator, a sharp slowdown will cast doubt on the sustainability of the economy’s modest revival."

The fourth quarter 2019 inflation statistics are meanwhile due at the end of January and they will provide the RBA with further guidance ahead of the key February meeting. "But only a major

surprise would upset the RBA’s outlook," says Plank.

Sterling Prone to Shifts in Trade Negotiation Sentiment

Sterling weakness at the start of the new week comes as markets digest latest developments concerning EU-UK trade negotiations and await a key set of economic data due out at the end of the week that should dictate as whether the Bank of England cuts interest rates or not on January 30.

Weekend comments from Chancellor of the Exchequer Sajid Javid suggest the UK will not seek alignment on EU rules as a basis for future trade relationships, instead the country would seek the required regulatory divergence that allows it to strike up fresh and unique trade deals with other countries.

"There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union - and we will do this by the end of the year," Javid told the Financial Times, adding, companies must 'adjust' to the new reality.

"GBP is underperforming in markets that are otherwise moderately risk-on overnight. In a weekend interview, Chancellor Javid warned business that that UK regulation would diverge from the EU after Brexit," says Adam Cole, foreign exchange strategist with RBC Capital Markets. "The comments, which would imply limited access to European markets seem to diverge from the 'common high standards' implied by the political declaration on the future relationship."

The EU wants the UK to stay in line with its regulations in return for a zero tariffs, zero quotas trade deal but Prime Minister Boris Johnson has repeatedly vowed to break free from the EU's rules.

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Two weeks ago President of the European Commission Ursula von der Leyen said in a visit to London that while she wanted the EU and UK to be as closely aligned as possible, the more divergence the UK wanted, the less accommodative the future trading relationship will be.

The comments from Javid at to the sense that the upcoming trade negotiations between the two sides will be fraught with difficulty, with the UK wanting to diverge but avoid the costs of doing so. For their part, the EU will likely strike an uncompromising tone on divergence.

This will increase market fears that the UK and EU will be unable to secure a new trade deal before the year-end deadline, which will create an atmosphere of anxiety within which the British Pound will likely struggle.

"Brexit uncertainty will continue throughout 2020 if this quote from the Chancellor of the Exchequer, Sajid Javid, is anything to go by: 'There will not be alignment, we will not be a ruletaker, we will not be in the single market and we will not be in the customs union.' Who’d trade Sterling?" says ANZ's Been.

Sterling this Week: Data to Watch

The Pound was the worst performing major currency last week although it still faces a plethora of risks that have scope to cause volatility in the coming days.

Tuesday marks the release of unemployment and wage growth figures for December, which have been elevated in importance by the dire messages coming from other data released in the last fortnight.

Consensus is looking for the unemployment rate to hold steady at a multi-decade low of 3.8% for December and for wages to have grown by an annualised 3.1%, down from 3.2% in November.

The data is out at 09:30 Tuesday while IHS Markit PMI surveys are due at the same time Friday. Markets are looking for the domestically as well as globally troubled manufacturing sector to have retrenched at a lesser pace this month.

The manufacturing PMI is seen rising from 47.5 to 48.8 but remaining below the 50 level that separates industry expansion from contraction. Meanwhile the more important services PMI is seen rising from 50.0 to 51.1.

“A stream of disappointing UK data has confirmed the MPC's concerns and sharply increased the odds of a January rate cut. Both November UK labour data and January PMIs will be crucial factors to watch next week. A downside surprise or signs that the data is not improving would likely cement market expectations of a cut,” says Chris Turner, head of FX strategy at ING.

Inflation and retail sales data out last week have prompted the market to go further in pricing-in a January 30 rate cut from the Bank of England and in the process, undermined appetite for the Pound. Retail sales revealed the economy hasn't seen any boost from the Black Friday promotions, which it typically does, adding to mounting evidence of a final quarter contraction.

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