- GBP/AUD is probing the bottom of its recent range and looks vulnerable to a breakdown but overall its too early to say

- The main release for the Pound in the week ahead is PMI data

- The Australian Dollar could see volatility from the Reserve Bank of Australia rate meeting

© kasto, Adobe Stock

The Pound-to-Australian Dollar starts the week trading at 1.8184 after a deep sell-off took the pair all the way from its range highs in the 1.8450s down to the range floor in the 1.81s.

The strength of the down move at the end of the preceding week is a negative signal for the future outlook for the pair and there is a possibility it could breakout from its range and move substantially lower.

Ultimately it is too early to confirm a downside bias, however, and the 50-day moving average (MA) is situated just below the consolidation providing a further obstacle to more downside, as large MA's tend to impede the progress of the trend, and can even lead to complete reversals.

This is due to the increased buying and selling around them which can lead to strong counter-trend moves.

I have highlighted the obstacles to a downside continuation by drawing an orange box containing hatching, labeled 'support zone', on the chart.

Of course, there is a strong possibility the pair could continue trading sideways as well. In such a scenario the start of the week ahead would witness a recovery back up towards the 1.84 range ceiling.

Because the possibilities both for a recovery and a break down are quite finely balanced, we have decided to desist from making a forecast for the week ahead - the trend technically remains bullish but the chart looks very bearish, which leads us to adopt a neutral stance for the sake of prudence.

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Data and Events to Watch for Australian Dollar

The main event for the Australian Dollar in the week ahead is the policy meeting of the Reserve bank of Australia (RBA) on Tuesday, May 1 at 5.30 GMT.

"This would normally be a 'cut and paste meeting' as the RBA leaves the cash rate at 1.5% once again," comments TD securities in their note on the week ahead, "however, this is a quarterly SoMP-based meeting, and with firmer retail sales, higher Q1 core CPI and a weaker exchange rate than expected, the RBA starting point for its core inflation profile is now 2%/y and may be lifted from 1¾%/y to 2%/y for 2018, released 4 May," they add.

This seems to suggest the possibility of an upward revision to growth and inflation forecasts, and if the rhetoric from Governor Lowe at the press conference after is more optimistic the Australian Dollar will probably benefit.

Another key release is the Balance of Trade on Thursday at 2.30, which is forecast to show a 0.5bn surplus in March from a 0.825bn result in February. A rise in the surplus above the expected might support the Aussie Dollar as it would be indicative of rising exports or falling imports. Given the former must be paid for in Australian Dollars such a change tends to lead to a stronger currency.

Data and Events to Watch for the Pound

The main data release for the Pound in the week ahead will be the release of April Service and Manufacturing PMIs out at 9.30 on Thursday and Tuesday respectively.

PMI is short for Purchasing Manager Index, and PMIs are survey-based indicators which are seen as useful forward-indicators of economic activity. The market consensus appears to be for expecting a rebound in Services in April after the drop in March, which was put down, mainly to bad weather. Services PMI in April is expected to rise to 53.5 from 51.7 and Manufacturing to 54.8 from 55.1.

The Pound may be especially sensitive to the results this week owing to the lazer-like focus currency markets are currently placing on UK economic data.

Sterling fell by over a percent against both the Euro and US Dollar in the wake of economic growth data which revealed the UK economy grew a mere 0.1% in the first three months of 2018, growth that has virtually killed any prospect of an interest rate rise being delivered by the Bank of England in May.

"UK Q1 GDP disappointed Friday by growing only 0.1% q/q - the worst quarterly growth rate since 2012 - casting doubt whether the Bank of England is going to hike next week, as almost all expected just a few weeks ago. We think it is a close call now and think the PMIs for April are going to be extremely important for the Bank of England's decision," says Kristoffer Kjær Lomholt, Senior Analyst with Danske Bank.

Will the incoming data surveys point to a pick-up in activity, or will they suggest the economic slowdown is more entrenched?

From the market expecting a hike with almost 100% certainty a few weeks ago, the probabilities have now fallen to circa 50% after comments from the governor of the BoE suggested there might be a delay owing to the downturn in data.

The possibility of a delay in raising rates led to a drop in the Pound which is highly sensitive to interest rate expectations.

Expectations of higher rates tends to lift the Pound and vice versa for the lower rates. This is because higher rates tend to attract greater inflows of foreign capital drawn by the promise of higher returns and this increases demand for the Pound.

"We may see an outsized market reaction from any surprises, as they tilt markets toward or away from a May BoE hike," say global investment bank TD Securities in a note covering the week ahead.

The bullish market forecasts for Manufacturing are not shared by some, including Philip Shaw, an analyst at Investec, who sees risks to April's figure both from the sharp appreciation in the Pound and the heightened talk of a trade war in early April.

Shaw does, however, share the market's more upbeat forecast for Services, which he expects to rebound by three points to 54.7 due to the temporary impact of bad weather dissipating.

More generally the lack of market-moving data besides PMIs means the weak could be a slow one for the Pound.

"Domestically, next week may represent a lull before the storm provided by the 10 May Bank of England Inflation Report and MPC announcement," says Shaw. "Bearing in mind Mark Carney’s comments last week about mixed data, the decision may be more finely balanced than we had envisaged."

"But we judge that the MPC will believe that the tight labour market will override the softer than expected short-term inflation environment," concludes the analyst.

The other major event in the week ahead for the Pound is the UK local elections on Thursday, May 3 at 1.00 GMT.

The main way it could impact is via Brexit expectations, such as for example if there is a surprise outsized vote for the anti-Brexit liberal democrats, which might be Sterling positive.

If the Conservatives win a larger-than-expected majority it could impact on Sterling in two ways depending on how investors interpret the result.

It could be negative for Sterling because the Conservative party is probably the party most in favour of the 'harder' forms of Brexit.

At the same time is could be positive for the Pound if it is interpreted as showing increased confidence in Theresa May's leadership, suggesting a reduction in the influence of the far right within the party, and therefore more likely to deliver a pragmatic rather than ideologically driven Brexit solution.

A Labour landslide would be negative for Sterling, according to TD Securities.

"While polls have consistently been pointing toward big Labour wins/Conservative losses at next week's local elections, with GBP being vulnerable to political developments, we may see a negative market reaction to any "Labour landslide" headlines. Vote counting only begins on Friday, so results should trickle out later that day," say TD Securities.

It is not unusual for voters to use the local elections to express dissatisfaction with the reigning government so a labour victory would not be particularly surprising or necessarily especially indicative of future voting patterns.

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