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The Pound is likely to continue trending higher against the Australian Dollar but the EU Council summit at the end of the week could prove decisive for the Pound's near-term outlook.

The British Pound has strengthened against the Australian Dollar over the course of the previous week and the exchange rate has in the process broken above the 1.8000 highs, providing a strong positive signal for more upside we believe.

Our technical studies of the market's structure - achieved through the use of the weekly price chart - suggests the medium-term trend is up:

In the previous week's forecast, we said that a break above 1.8000 would provide confirmation of a continuation up to the next target at 1.8200.

We have now had a break above 1.8000 and we continue to expect an extension up to the aforesaid target, however, for more confirmation, we would ideally like to see a break above the more recent 1.8088 highs to reinforce confirmation.

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Data and Events to Watch for the Australian Dollar

The main release for the Australian Dollar in the week ahead is probably labour market data for the month of February, which is out at 12.30 GMT, on Thursday, March 22.

An unexpected improvement in the labour market could help support the Australian Dollar as it would suggest inflationary pressures, and higher inflation leads to higher interest rates which draw greater capital inflows from foreign investors seeking a profitable place to park their money.

The unemployment rate is expected to remain unchanged at 5.5% in February and employment change to show a 20k rise, from 16k in January.

"A positive Australian February employment report (Thu) can offer AUD/USD some intra‑day support. In line with consensus, we project an increase of 20,000 jobs in February and no changes to the unemployment rate (5.5%)," says Elias Haddad, a foreign exchange strategist with CBA in Sydney.

The other main release in the coming week are the minutes from the last meeting of the Reserve Bank of Australia (RBA), however, given recent comments from RBA officials have been more or less neutral overall and markets do not expect an interest rate increase until 2019, it is unlikely to change that view unless it is unexpectedly positive and suggests a hike in 2018, which is unlikely.

"Tuesday’s RBA March meeting Minutes will likely offer more details regarding the RBA’s constructive domestic economic growth outlook," says Haddad. In Q4, Australia’s GDP growth slowed at an annual pace of 2.4% but the RBA’s post‑meeting March statement noted the Bank’s central forecast is "for the Australian economy to grow faster in 2018 than it did in 2017”.

Should the tone be repeated we would expect AUD to remain supported.

Overall the market is quite pessimistic about the Aussie after it sold off heavily last week, despite positive consumer confidence data and comments from the RBA, and it is against this souring backdrop that data in the week ahead will be analyzed.

"Lower commodity prices, risk aversion and a general demand for U.S. Dollars caused AUD/USD to break the bottom of a 3-day range and close in on a 3 month low. There is quite a bit of support near 0.7700 but looking back to January 2018, lower peaks point to further weakness," says Kathy Lien, managing director at BK Asset Management.

Data and Events to Watch for the Pound

It is a busy week for UK data with the highlight being the EU summit on March 22-23 which will determine whether the EU and UK will enter a two-year 'transition period' after the official Brexit deadline has passed in March 2019.

A transition period keeps trade settings between the EU and UK more or less unchanged and helps businesses avoid the spectre of a cliff-edge Brexit in 2019 which would see the trade relationship default to World Trade Organisation (WTO) rules tariffs.

The Pound's fate in the coming weeks thus depends very much on whether a transition agreement can be approved.

"If negotiations do indeed proceed in line with the scheduled timetable, this should help to reassure investors that a final deal is indeed possible which should have some upside for the Pound," says a note from global investment bank Investec.

Markets are quietly confident a deal will indeed been reached based on the hints that have been coming through in recent days, Robin Walker - who serves as Parliamentary Under Secretary of State at the Department for Exiting the European Union - said in a speech at the Institute of Directors last week that "we recognise how important it is to secure the deal on the implementation period as soon as possible. I want to stress that we are very close to a deal at this time.”

“Both the prospect and the timing of a transitional deal on Brexit remain highly uncertain. If such a deal does take place, however, it could be an important positive development for Sterling in the near-term by reducing 'cliff-edge' risks," says Lefteris Farmakis, an FX strategist at UBS Group.

However, the issue of the Irish border remains a thorny issue that has long appeared to be at an impasse, and it could yet come to deliver disappointment so nerves will remain elevated.

The other major event for the Pound is the Bank of England (BOE) rate meeting on Thursday at 12.00 GMT. Although no-change in policy is expected analysts will be carefully combing the meeting minutes, released after the meeting, for signs of which way the monetary policy committee (MPC) appears to be swaying when it comes to future policy.

At the previous meeting, the BOE said they thought markets were underestimating how close the BOE was to increasing interest rates and analysts will be watching for whether this is still the case, according to Nordea Bank's chief analyst Martin Enlund et al.

Much depends on whether the BOE decides to keep the new phrase introduced in its last policy statement that, "monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period."

If the phrase is kept in then it would indicate a greater urgency to raise interest rates than currently expected and result in upside for the Pound.

Higher interest rates are generally bullish for a currency as they increase inflows of foreign capital drawn by the promise of higher returns.

Another major release in the week ahead for the Pound is inflation data out on 9.30 on Tuesday, and this is forecast to show a slow-down in the rate of inflation to 2.8% year-on-year in February, i.e compared to a year ago, from 3.0% in the previous month.

On a monthly basis, it is forecast to show a 0.5% rise from a -0.5% in the previous month of January. Normally high inflation stimulates currency appreciation because it suggests interest rates will rise, especially if it is caused by stronger growth, but because UK inflation has been caused predominantly by the weak Pound increasing the price of imports rather than growth, the relationship is a little more complex and the Pound may act unpredictably after the release.

Wednesday sees the release of UK labour market data which could also impact on the Pound - if labour data is positive, especially wage data, it is likely to strengthen Sterling.

Average Earnings are forecast to rise to 2.6% in January from 2.5% in December - both including and excluding bonuses - and if this occurs it could provide an impetus to the Pound.

The unemployment rate is forecast to stay unchanged at 4.4% and employment change to show that an extra 85k more jobs were added to the economy when the data is released at 9.30 on Wednesday morning.

Thursday sees the release of another potentially market-moving release in the form of Retail Sales, which is forecast to show a 1.5% rise yoy in February from 1.6% previously and 0.4% month-on-month from 0.1% in January.

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