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- GBP/AUD continues to bounce between major levels with no clear directional trend

- Australian inflation data could turn tables on inert rate if it surprises

- Brexit politics still dominate Sterling with CBI data also offering heads up

The Pound-to-Australian Dollar exchange rate lost ground last week following a surprise jump in Australian employment data, which showed more people in work than expected which had a positive effect on the Australian Dollar.

The Pound has meanwhile suffered a bout of Brexit-induced sentiment deterioration which leaves it vulnerable over coming days.

"GBP will struggle to edge higher against USD and AUD because of ongoing Brexit related uncertainties. The UK House of Commons is in recess from 24 July to 4 September but the internal and external political hurdles Prime Minister (PM) Theresa May faces with respect to Brexit negotiations remains. It’s still unclear if PM May’s July 2018 White Paper proposals on the future relationship between the UK and EU will be accepted by European leaders," says Richard Grace, a strategist with CBA in Sydney.

The move lower in GBP/AUD does however follow a period of gains, which gives us the following chart pattern:

The sudden up and down changes in direction reflect the broader sideways trend the pair has been going in between 1.74 and 1.84 ever since the start of the year.

Two of the most significant moving averages (MAs) - the 50 and 200-week MA - are bordering recent market activity and are located below and above the current level.

These large MAs are reinforcing the range-bound nature of the market.

The exchange rate will find it difficult to break through these MAs which act as dynamic levels of support and resistance. This means they tend to to have a repelling effect on prices when they get near to them leading to a higher chance of pull-backs and reversals.

MAs have this quality because they are popular decision-making tools used by both institutional and private traders which means they tend to be the loci of heightened liquidity and volatility.

The 50-month MA is further capping gains at the 1.85 March highs on the month chart (see below).

The flip-flopping nature of the price action is very difficult to forecast and essentially represents a 'random walk' with little technical bias one way or another.

We have decided, therefore, to adopt a neutral stance towards the exchange rate in the week ahead and withhold making a directional forecast.

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What to watch for the Australian Dollar this Week

The main release in the week ahead for the Australian Dollar is inflation data for Q2, which is forecast to show a rise to 2.2% from 1.9% in Q1 compared to the same time in 2017.

On a quarter-on-quarter basis it is forecast to rise by 0.5%, when the data is released on 1.30 GMT on Wednesday, July 25.

If inflation rises above 2.0% in Q2 as widely expected it will enter the lower band of the Reserve Bank of Australia's target band between 2-3% since the first quarter of 2017.

Higher inflation often prompts central banks to raise interest rates which has an appreciative effect on the currency, however, CPI data next week, is unlikely to lift the Aussie, much, according to broker XM:

"Next week’s inflation figures might also struggle to lift the aussie given the growing trade risks and widening yield differential with the US even if, as expected, the RBA hits its price target."

Daniel Dubrovsky, an analyst at DailyFX.com makes the point that the RBA tend to watch the 'trimmed mean' more carefully, and that is not expected to rise as much.

"CPI y/y is expected to increase to 2.2% while the trimmed mean measurement holds steady at 1.9%. The latter is a more underlying reading of inflation which the Reserve Bank of Australia closely follows," says Dubrovsky.

"Lately, Australian economic data has been tending to outperform relative to economists’ expectations. A similar outcome here could increase RBA rate hike bets. At the moment, overnight index swaps are pricing in a better-than-even chance of 55.1 percent that the central bank will raise rates in July 2019. Needless to say, an outcome that goes against the central bank’s projections for inflation would bode ill for AUD," he adds.

The Calendar for the Pound this Week

While technical studies hint at more downside for Sterling, the picture is significantly more complicated than the charts imply and in our opinion there could be some relief for the Pound as market focus shifts to 1) Bank of England interest rate pricing and 2) thinning Brexit-related headlines.

The week ahead for UK data kicks off on Monday with a speech from Deputy Governor of the Bank of England Ben Broadbent to the Society of Professional Economists in London at 18:00 GMT.

Analysts will be listening out for any comments in relation to Broadbent's stance on hiking rates in August. Current probabilities favour a hike from 0.25% to 0.75%.

The Consortium of British Industry (CBI) Industrial Trends Survey is released at 11.00 GMT on Tuesday, July 24, and is forecast to come out at 10 from 13 previously.

The result is the balance between positive and negative survey answers. Data from the CBI often gives a timely indication of economic trends and is closely watched by the market.

Mortgage Approvals are due for release on Wednesday at 9.30 and forecast to show a rise of 39k in June from 39.4k in the previous month of May.

Friday sees the release of Nationwide Housing Prices in July, which are expected to show a 0.5% rise from June and a 2.0% rise since July 2017.

The other main driver of the Pound in the week ahead will be the ongoing debate over Brexit.

Sterling weakened last week as fears resurfaced of a hard Brexit following Brussels's mixed response to Theresa May's Chequer's proposal, which itself was a hard-won compromise.

EU Chief negotiator, Michel Barnier was overall positive about the plan which he said had elements that were "very useful" however he was concerned it undermined the "integrity of the European Union" as a free trade region.

The reaction was seen by many as a sign the EU would want further compromises.

Given the negative response from many Brexiteers over the current proposal further compromises are seen as unrealistic, hence markets started to price in a 'no deal' Brexit which ultimately reflected in a weaker Pound.

Barnier's most recent comments on the nature of the border with Ireland did show some signs the EU was willing to show flexibility on its previous backstop solution.

This kept the border between Northern and Southern Ireland open and for the 'de facto' actual border between the UK and EU to shift to between Northern Ireland and the rest of Britain via a set of "control points" across the Irish sea.

The EU's backstop has been seen as unacceptable to Ulster Unionists, Theresa May's allies in parliament, who demand Northern Ireland and the rest of the UK remain intact after Brexit, and to the wider Conservative party.

We believe there was something of a breakthrough on Friday following the EU General Affairs Council meeting when Barnier said the EU was in fact willing to search for a compromise on the question of the Irish border and revise its backstop.

A possibility of a no-deal has weighed on the Pound since the referendum and risks pushing the currency even lower in the week ahead. Likewise, relief is possible too, especially if Theresa May's proposal gains favour in Brussels.

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