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- GBP/AUD bounces off hard floor and establishes new uptrend

- Longer-term charts mixed and contradictory

- Pound to be driven by wage data; Aussie by

The Pound-to-Australian Dollar exchange rate starts the new week trading at 1.8348 having climbed over a percent during the week before.

Gains came mainly as a result of a weakening of the Australian unit after lower-than-expected inflation data suggested the Reserve Bank of Australia (RBA) might actually lower interest rates over coming months.

Lower interest rates tend to weigh on the local currency as they detract from foreign capital inflows which favour jurisdictions with higher interest rates where their money will earn a higher interest return.

From a technical point of view, the previous week witnessed a complete 180 degree revolution in the outlook for GBP/AUD, after the pair stopped just above tough support from the 200-day moving average (MA) amongst other levels, reversed trend and surged higher.

The rally got stopped at the 50-day MA at 1.8435 and pulled back in a vague 3-wave ABC pattern (visible on the 4hr chart) which presupposes more upside since the market often corrects in three-wave moves.

Given the market principle that the trend has a greater tendency to extend rather than reverse we now see a bias to further upside conditional upon the existing 1.8450 highs being breached.

Such a break would probably lead to a continuation up to a target at 1.8600.

Medium Term Enigma

There are two possible technical interpretations of the medium-term charts, the first is bearish, the second bullish.

Interpretation once is that a bearish broadening formation also known as a loudspeaker pattern has been forming ever since the beginning of 2018.

Broadening formations are usually composed of 5 waves, labeled A-E, with GBP/AUD in the process of unfolding the final 5th E-wave down. Wave-E might take the pair all the way down to the borderline at around 1.7200 eventually.

An alternative, equally valid interpretation of the chart sees GBP/AUD as rising within a very large ascending channel. This produces a more bullish general outlook for the pair over the medium term, unlike the broadening formation.

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The Australian Dollar: What to Watch this Week

The main release for the Australian Dollar is probably Chinese data in the shape of manufacturing PMI out Tuesday at 2:00 B.S.T.

The PMI data for April will show whether Australia's largest trading partner has indeed turned a corner from its recent soft patch.

PMIs for March suggested this is indeed the case, the data is considered to be on of the drivers of the recent pick-up in global investor sentiment over recent weeks: conditions that would typically favour the Aussie currency.

Analysts are looking for a reading of 50.7, up a notch on March's 50.5.

Thursday sees the Caixin Manufacturing PMI due to be released at 02:45 B.S.T., and markets are looking for a reading of 51.0, up slightly on the previous month's 50.8.

Domestic Australian data may also come under unusual scrutiny following last week’s terrible inflation figures which showed a much deeper slowdown in price growth than had previously been forecast. This suggested the economy was slowing down and resurrected expectations the RBA might decide to cut interest rates, after deputy governor Debelle underplayed the possibility in a speech in Adelaide recently.

As such, domestic data will probably provide further information on the state of the economy and therefore the likelihood or not of a rate cut. Lower interest rates normally weigh on the local currency as they detract from inflows of foreign capital which favour jurisdictions where they will make a higher interest return.

Of the various domestic releases, private sector lending numbers for March are expected to show a 0.3% rise month-on-month when released on Tuesday - the same rate as previously - and building permits are expected to show a -12.5% decline in March after rising 19.1% in February, when they are released on Friday at 2.30.

Another housing release is new home sales on Thursday. The two housing releases are important as one of the factors making it more likely the RBA will reduce rates is the worsening housing market.

The Pound: What to Watch This Week

The main event for the Pound is the Bank of England (BOE) rate meeting which will end with an announcement on Thursday at 12.00 BST.

The BOE is not expected to raise interest rates at the meeting despite robust economic data. Actual growth remains subdued at 1.2% (the weakest since 2009) due to business uncertainty going "through the roof" because of Brexit, so it is unlikely the Bank will want to change rates until after more clarity emerges.

Despite talk of a ‘grab and go’ rate hike in August, Reuters polls forecast rates will not move until early 2020, a calendar quarter later than was forecast a month ago.

The hunt for a new governor to replace Carney in October adds more uncertainty to the mix.

The BOE will publish its quarterly inflation report at the May meeting which includes the latest economic projections, and this is likely to garner more attention than usual - and possibly produce more volatility.

The pound is unlikely to see a big reaction to the BOE decision but any dovish tilt by the Bank - dovish meaning in favour of lower interest rates - could weigh on Sterling, which slipped to 10-week lows versus the US dollar this week.

Lower interest rates or the threat of them can be negative for a currency because they detract from foreign investment inflows, which tend to favour jurisdictions which can offer higher interest returns.

PMI Data

The other major release in the coming week are the release of PMIs for April. These may be closely watched as they recently declined in contraction territory which is defined as a reading below 50. They are seen as a forward indicator for the economy so this raised concerns softer official economic data is coming.

Although official UK data has not yet followed in their footsteps, another gloomy set of PMIs could increase the risk it will.

The Manufacturing PMI is out on Wednesday at 09:30 B.S.T.

In March the PMI rose because of stockpiling by companies preparing for a potentially distruptive Brexit, rather than due to genuine growth. The number expected by markets is 53.2, down from the previous month's 55.1.

Construction PMI fell to 49.7 in March and is forecast to rebound to 50.4 in April when data is released at 9.30 on Thursday.

UK services PMI is the big number to watch as this is a sector that accounts for over 80% of UK economic activity.

The previous month saw the Service PMI plunge below 50 and into contractionary territory in March, falling to 48.9, but data out on Friday at 9.30 is expected to show a rebound to 50.4 in April. If it disappoints the Pound could suffer.

Brexit Impasse Continues

Brexit could also still be a driver of the Pound in the week ahead. Talks between the government and the opposition Labour party have not reportedly made much progress. At the same time pressure is building on the Prime Minister, Theresa May, to resign. If she does go, the Pound will weaken.

On the other hand, the announcement of a joint deal with Labour could lead the way to a stronger Pound. Yet this seems unlikely given the UK’s adversarial political system which does not favour bi-partisanship.

There seems little incentive for Labour to help the Conservatives out of their current self-destructive, death-spin over Europe. If anything there is probably more chance of greater uncertainty in the short-term, not less, as Corbyn is more likely to bide his time and watch the Conservatives be their worst enemy than help Theresa May out of her current deadlock.

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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