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- GBP/AUD to fall as larger trends push rate lower

- Channel looks vulnerable to break down eventually

- Labour data main driver of both currencies

The GBP/AUD exchange rate is trading at around 1.7904 at the start of the new week, 0.22% lower than the previous week. The pair is in a downtrend which is forecast to continue over the next five days.

The 4-hour chart - used to analyse the short-term trend, which means the next 5 days of trading - shows the pair rose and then fell last week, broadly going sideways.

Of course, there is a chance this range bound trend could continue in the week ahead if the pair bounces off the 1.7850 lows and then finds a top at or near the 1.8050 range highs.

At the same time given the prior trend was bearish the pair could also fall to a major trendline at 1.7750 where it is then likely to pause and bounce due to tough support.

A break below the 1.7850 July lows would provide confirmation for a break lower.

The daily chart shows how the trend since the start of May has been more or less bearish all the way.

This is now expected to continue down to the major trendline at 1.7750 and then assuming a break, lower to the next target at the 1.7625 January lows.

At that level, it could either continue breaking lower to new lows or consolidate sideways for a time.

Of course, there is also a possibility the exchange rate will find support at the trendline, bounce and then start rising within the channel again, with a potential upside target at the 1.8115 June lows.

We use the daily chart to analyse the medium-term which is defined as the next week to a month ahead.

The weekly chart shows the pair rising in a channel which nevertheless looks fated to break lower, especially considering the prior steep downtrend in 2016.

It shows how a breakdown out the channel might very well be expected to reach a target at the 2018 lows at 1.7225 over the long-term.

It also shows the outline of a possible broadening formation (BF) drawn in green, which is a bearish price pattern.

BF’s are normally composed of 5 waves, labeled A-E and it looks like GBP/AUD is currently in wave E.

This pattern indicates a potential target at 1.7000, at the bottom of the BF.

We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.

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The Australian Dollar: What to Watch this Week

Chinese data could impact the Aussie due to the high amount of trade the two countries conduct with each other.

Chinese second-quarter GDP growth is expected to show a slowdown to 6.2% from 6.4% on a yearly basis when it is released on Monday at 3.00 BST.

If the slowdown is greater-than-expected then it could weaken the Australian Dollar, as it will suggest the Chinese economy is struggling due to the disruption caused by the U.S.-Chinese trade war and this may lower demand for Australian exports.

It is possible, however, the data may also be better-than-expected which would support the Australian Dollar.

The cost of shipping is measured by the Baltic Dry Freight Index which is widely regarded as a leading barometer of global growth, and this index has actually risen in 2019 despite the heightening concerns around the global slowdown.

The chart below shows how closely the Baltic Dry Freight Index leads the Caixin Chinese manufacturing PMI.

The latter showed a deeper-than-expected contraction last month which stoked growth fears but if the relationship holds it should see a rebound, with the possibility of growth may also rise, although whether that is now or later is difficult to determine.

Another key release is the RBA meeting minutes.

At the RBA July meeting, the central bank cut interest rates by 0.25% for the second consecutive time down to 1.00%.

The meeting minutes will include board member’s deliberations and could shine a light on whether the central bank thinks economic conditions are dire enough to warrant another interest rate cut when they are released at 02.30 on Thursday.

The RBA’s official stance is that it is in a wait and see mode and will "monitor developments in the labour market closely and adjust monetary policy if needed".

The main bugbears are below-target inflation, slowing economic growth and a loss of momentum in the jobs market.

If the minutes reveal a more dovish tilt (meaning more inclined to cut rates) the Australian Dollar will weaken as currencies closely follow the course of interest rates, due to their influence on capital flows.

The importance of the labour market to the RBA makes the final major release of the week even more key for the currency.

Australia’s strong jobs market had kept the RBA from cutting rates for a long time but when they started to see cracks in even the labour market they decided to make their move.

Australian labour market data is forecast to show unemployment to remain at 5.2% and 10k jobs added to the economy in June when it is released at 02.30 on Thursday.

If the stats show a higher-than-expected number of full-time jobs were created or the unemployment rate falls substantially the Australian Dollar could rise from the optimism it might engender.

The Pound: Inflation, Labour Market Data in Focus

The winner of the Conservative leadership election is not scheduled to be announced until July 22, so the Pound will probably be less affected by Brexit news in the week ahead and attention may shift to hard data instead.

On that front, there are three major releases, including labour market data out on Tuesday, inflation on Wednesday and retail sales on Thursday.

UK data has deteriorated recently, especially the PMI survey data which is seen as a reliable leading indicator of harder economic data and growth. Having said that, May GDP surprised to the upside, coming out at 0.2% when analysts had anticipated a 0.1% rise.

The last speech from Mark Carney, the governor of the Bank of England (BOE), was less optimistic and suggested the BOE was finally joining the rest of the ‘pack’ of central banks in adopting a preference for lower interest rates, mainly due to fears about global growth. This marked a turnaround from the previous bias of the BOE to raising rates.

On Tuesday, UK labour market data is forecast to show the unemployment rate still at 3.8%, another 22.9k jobs added to the economy and average wages rising by 3.1% in June, when it is released at 9.30 BST.

The data is at a fairly strong starting point so only an unexpected decline would dent Sterling - anything within expectations or higher would probably keep the currency supported.

Keep an eye on wage dynamics in particular as the rule-of-thumb in economics is that rising wages tend to lead to higher inflation, which prompts the central bank to raise interest rates to keep a lid on prices. And, a side effect of higher interest rates is a stronger currency.

The UK's wage dynamic has been a source of support for Sterling over recent months, with wages now easily oustripping the inflation rate which has in turn prompted expectations for a Bank of England interest rate rise in coming months.

The risk is that wage increases start fading in strength, which deprives the under-pressure Pound of one of its last remaining elements of support.

Inflation data out on Wednesday at 09:30 B.S.T. will be another key release to watch for Sterling, with a beat on expectations likely to prove supportive and a weaker-than-forecast figure likely to weigh.

Markets are looking for annualised CPI to read at 2.0%, bang on the Bank of England's mandated target.

Month-on-month inflation for June is forecast to show price increases of 0.3%.

The next most important release is retail sales data which is expected to show a -0.3% decline in June compared to the month before when it is released at 9.30 on Thursday.

Retail sales have been falling recently and survey data for June from the British Retail Consortium (BRC) suggests the decline will probably continue.

“Recent confidence surveys suggest the underlying trend in the retail sector remains soft, and the consensus expects another decline, of 0.3% month-over-month in June,” says Wells Fargo in a preview note.

A bigger-than-expected decline would stoke UK slowdown fears and weigh on the Pound.

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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