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- GBP/AUD to probably continue lower

- Recent recovery not enough to reverse downtrend

- Pound to be driven by Brexit developments, BOE and PMI

- Aussie eyes China PMIs and CPI

The Pound-to-Australian Dollar exchange rate is trading at around 1.7910 at the start of the new week, 0.95% higher than a week ago.

The pair has rebounded since piercing below a major trendline but the downtrend is dominant and expected to continue over the next five days.

The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows GBP/AUD having recovered after breaking below the lower borderline of a large rising channel.

Although the pair has rebounded strongly after the break and has pulled back above the trendline, which could indicate it was a false break, the overall trend is still bearish and given ‘the trend is your friend’ it should exert itself and push the exchange rate lower, eventually.

We see a probable recapitulation back down to the July 16 lows as probable in the short-term.

A break above the July 25 highs at 1.7985 would strengthen the bullish case but there is so much tough resistance from a minor trendline right above and major moving averages (MA) initial upside is likely to be severely capped.

The daily chart - used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead - shows the evolution of the bearish case and how a break below the July 16 lows could lead to a continuation down to a target at 1.7215 and the November 2018 lows.

The RSI momentum indicator is nearing a trendline drawn on its downtrend which coincides with the minor trendline on the raw price chart and this supports the bearish outlook and increases the possibility the pair might rotate at the trendline and move lower.

The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows the pair in a long-term rising channel.

The recent break below the major trendline explored on the daily and 4hr charts is actually also a breakout from the channel on the weekly chart.

Assuming the pair can rebreak below the July 16 lows there is a possibility it could continue down to a long-term target at 1.7000, equal to the height of the channel extrapolated lower by 61.8%.

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The Australian Dollar: What to Watch

A mixture of Chinese and domestic data is likely to drive the Australian Dollar in the week ahead.

On the Chinese data front, there is Manufacturing and Non-Manufacturing PMI data out on Wednesday and on the domestic front, there is inflation out on Wednesday and retail sales out on Friday.

All are likely to show how the Chinese economy is progressing, which is important for AUD as China is Australia’s largest export destination and single most important source of foreign currency earnings.

This is why the Aussie is sometimes called a 'liquid' proxy for China's Renminbi.

Chinese PMI data, which gauges activity in different sectors based on survey responses from purchasing managers in the companies within that sector, has been poor recently - not just in China but most of the world - and analysts will be keen to see if the trend extends into July when data is released on Wednesday.

Chinese Manufacturing PMI in July is forecast to rise to 49.6 from 49.4 previously when released at 2.00 BST early on Wednesday morning.

Non-manufacturing PMI is expected to fall slightly to 54.0 from 54.2 over the same period.

A surprise drop in the figures would weigh on the outlook for trade, the global economy, and the Australian Dollar; conversely, a surprise rebound in Chinese PMIs would support the Aussie.

Looking at the domestic agenda, Australian inflation has been subdued recently and this prompted the Reserve Bank of Australia (RBA) to lower interest rates in both June and July, by 0.25% a month, reducing the base rate from 1.5% to 1.0%.

Lower interest rates are negative for a currency as they attract lower net inflows of foreign capital from abroad, so the cuts hurt the Aussie.

Therefore, CPI data in July is likely to be closely followed and is expected to show a 0.5% rise in Q2 over Q1 and a 1.5% rise compared to a year ago, when it is released at 2.30 on Wednesday.

This would beat the 0.0% and 1.3% rises respectively in Q1. If the inflation rate meets or is higher than expectations it will help support the Aussie but if it undershoots, investors will expect more interest rate cuts from the RBA and discount the Aussie accordingly, weakening it.

"Rising oil prices over the quarter are the main driver for higher headline CPI. A pick-up in annual private health premiums, rising airfares and the increase in tobacco excise suggest risks to the upside," says Richard Kelly, Head of Strategy at TD Securities.

Finally, retail sales is forecast to show a 0.3% rise in the month of June when it is released at 2.30 BST on Friday. This would be an improvement on May’s data which showed only a 0.1% rise. A greater-than-expected result would support the Aussie and it would be indicative of stronger growth.

The Pound: Brexit Headlines, Bank of England

Brexit sentiment is easily the most important driver of the Pound at present, and weekend headlines are unsupportive of the currency we belief.

Media reports suggest Prime Minister Boris Johnson has fully committed to a 'no deal' Brexit "by any means necessary".

The Sunday Times reports Johnson has set up a “war cabinet” to deliver Brexit “by any means necessary” by October 31 as a senior cabinet minister warned that there was “now a very real prospect” of no deal.

While markets have ramped up expectations for a 'no deal' Brexit since May, it is likely that there is further 'no deal' risk sentiment to be absorbed and therefore Sterling has the propensity to move lower and trigger fresh multi-month lows.

"Though we still see the risk of a no-deal Brexit at a fairly moderate 20%, we are bearish on Sterling over the short-term amid the expectation that Mr Johnson’s rhetoric towards the EU will remain belligerent and perhaps harden further still in the run-up to 31 October," says George Brown, an analyst at Investec.

On the calendar, the main event for the Pound next week is the Bank of England (BOE) rate meeting, since the BOE sets interest rates which are tier 1 driver of the Pound, however, in reality this may not be the case. Brexit uncertainty has paralysed the BOE and until it is resolved they are highly unlikely to take any action and all their guidance will be conditional on ‘a smooth Brexit’.

"Another possible trigger for sterling could be next Thursday’s Bank of England MPC decision, which is set to be accompanied by the quarterly Inflation Report. Our expectation is that the committee will vote to maintain the Bank rate at 0.75% unanimously (9-0) for the eighth meeting in succession," says Brown.

The current stance is still marginally hawkish due to upbeat wage growth and this sets the BOE apart from most of its G10 peers, with the exception of the bank of Canada. This should translate into pent up upside potential for the Pound should the UK achieve a managed Brexit.

However, as anyone who has been following developments in the new Boris Johnson administration this is far from certain. Johnson has gathered what looks increasingly like a ‘war cabinet’ of Brexiteer ministers who might be prepared to take the UK out of the EU with a 'no deal' Brexit on October 31.

“The Bank of England (BOE) continued to show a bias towards eventual tightening at its June meeting. This tightening is contingent on an eventual smooth exit from the European Union, however, an effort that has at times looked increasingly like a quixotic journey,” says Wells Fargo in a preview note on the meeting. “Inflation data have been stronger in the U.K. than in Europe, and according to the last statement “growth in unit wage costs has remained at target consistent levels.” “The U.K. economy has looked a bit more wobbly of late, particularly the manufacturing sector, which may be increasingly feeling the pressure from the factory sector struggles in continental Europe.”

The U.S. bank goes on to suggest ‘peer group pressure’ from other central banks turning increasingly dovish could be a further incentive for the BOE to turn dovish itself.

They forecast an eventual BOE rate hike not coming until 2020.

Given Manufacturing could be the weak link in the economy, the spot-light may be more closely trained on UK Manufacturing PMI data for July out on Thursday morning at 9.30 BST which is expected to show a decline to 47.7 from 48.0 previously.

A deeper-than-expected lapse as seen in European figures last week could spark weakness in the Pound, as it could be seen as the crack which could open up a wider slowdown.

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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