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- GBP/AUD meets 50-month MA as it trends higher

- Break above October highs required for confirmation

- UK politics key driver for Sterling, Chinese stock markets for the Aussie

The Pound is positioned for further gains against the Australian Dollar from a technical perspective, however the outlook for the GBP/AUD exchange rate will rest with a series of Brexit votes in the British parliament on Tuesday and the performance of Chinese stock markets.

The Pound-to-Australian Dollar exchange rate starts Monday at 1.8376 having risen 2.23% in the previous week. The pair is in a short-term uptrend which would normally be expected to be biased to extend, however, the location of a tough resistance level means there is also a high risk of a pivot lower. The conflicting signals make us neutral overall, though if pushed to make a call we are very slightly bullish.

GBP/AUD is trading up against the 50-month moving average (MA) at 1.8357, and this is expected to contain upside as it has done on multiple occasions in the past.

Yet at the same time, it is also the case that multiple attempts at cracking through a level can eventually succeed and lead to an even more volatile surge when successful.

The weekly chart looks bullish, with the pair rising inside an ascending channel. Another bullish sign is that it has broken above the 200-week MA.

The daily chart suggests the pair may pull-back in the immediate future now that it has finished forming an ABCD pattern since the two main legs (AB and CD) are of about equal length. If it has finished forming it should pull-back.

The bar for an extension higher is placed quite high because of the 50-month MA. An extension would be conditional upon a clear break above the MA, requiring a move above the October highs at 1.8725 for confirmation. Such a move might well reach 1.9000 however.

It is unlikely the October highs will be knocked out in the week ahead but it is possible they may be in the next month.

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The Australian Dollar this week

Without doubt, broader investor sentiment will likely remain in control of the Aussie Dollar over coming days, with readers urged to pay particular attention to the performance of Chinese stock markets.

There remains a strong correlation with the overall health of China and the Australian Dollar owing to the fact China is Australia's largest export market.

"The AUD has proven to be highly correlated with Chinese equities in the last year, acting as a proxy for economic and financial confidence in China. The recent recovery in the AUD has matched the rebound in Chinese equities," says Greg Gibbs, Analyst at Amplifying Global FX Capital.

"The outlook for Chinese and global equities has improved with broad policy stimulus in China, a less hawkish Fed that appears to have entered an extended pause in rates, and hopes for improved US-China trade relations as talks continue with a target date of 1-March for a trade agreement. This has contributed to rebound in the AUD so far this year, and it may see further gains in the AUD," says Gibbs.

Chart courtesy of Amplifying Global FX Capital

China's markets have lifted in 2019 amidst improved sentiment with regards to the U.S.-China trade spat, with both sides showing a clear willingness to negotiate a solution that would prevent the imposition of further tariffs in Chinese exports destined for the U.S. Investor sentiment should show an improvement at the start of the coming week on news that the U.S. government shutdown will temporarily end.

U.S. President Trump and Congress leaders reached an agreement to reopen the government for three weeks, until 15 February, following a 35-day shutdown – the longest in U.S. history. Further talks would be held over Trump’s demands for financing to build a wall on the U.S.-Mexico border

Also aiding global sentiment - and therefore Chinese markets - are reports the Federal Reserve is considering whether to slow down the reduction of its treasury bond holdings in line with a more cautious approach towards tightening monetary policy, something that is positive for stock markets.

Looking at the domestic scene, the week ahead is dominated by the fourth-quarter 2018 inflation data, due out on Wednesday at 00:30 GMT. Markets are forecasting 0.4% growth in the CPI quarter-on-quarter, with the annual number forecast to print at 1.7%.

A figure that comes in below these expectations could weigh on the Australian Dollar as it would signal that the Reserve Bank of Australia (RBA) has cause to cut interest rates over coming months to provide support to an economy that is witnessing a potential housing market slowdown.

"The past week showed that a strong employment trend is not enough to support the AUD. With this threshold having risen, the coming days could be ‘make or break’ for the AUD. The market focus on the implications of a weaker housing market and higher funding costs, means softer data could drive capitulation in the AUD, as expectations rise that the RBA will change its tone in February," says Daniel Been Head of FX Research at ANZ.

"Domestic Australian conditions may be deteriorating with increased concern centred around an accelerating decline in the housing market. This may weigh on Australian interest rates and yields and tend to cap the AUD exchange rate," says Gibbs.

The British Pound this Week

On Tuesday parliament votes on the government's 'plan B' on Brexit, which could give us a better steer on where the UK is headed and further cement expectations that a 'no deal' Brexit is becoming increasingly unlikely.

It is the growing expectation for this worst-case scenario to be avoided that has provided the fundamental fuel to the Pound's impressive start to 2019.

Prime Minister Theresa May is widely expected to say she will go back to Brussels to ask for further concessions required to make the Brexit deal more palatable to those in her party that voted against it earlier this month.

However, focus is likely to be on the amendments that will be tabled alongside the 'plan B' on Tuesday. The Cooper-Boles amendment is perhaps the

most significant as it gives Parliament the opportunity to force the government into requesting an extension to Brexit if parliament fails to approved a deal by February 26.

We believe the EU would consider such a request with Austrian Chancellor Sebastian Kurz saying last week any extension would likely only last three months.

While any delay only serves to extend the Brexit-induced uncertainty hanging over the UK economy, it does signal to the market that a worst-case scenario for Sterling - a 'no deal' Brexit - becomes increasingly unlikely.

On the data front, Friday February 01 sees the release of manufacturing PMI data, with markets expecting a reading of 53.5, down on the previous month's 54.2.

"While we expect only a moderate fall in January’s manufacturing PMI, recent weakness in the eurozone PMI means a larger drop cannot be ruled out," says Ruth Gregory, Senior UK Economist with Capital Economics.

We expect any impact on the Pound from data to be relatively short-lived owing to the all-encompassing importance of Brexit politics.

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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