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- GBP/AUD in short-term uptrend biased to extend

- Pair trade back inside long-term rising channel

- Pound to be moved by Brexit rhetoric; Aussie by trade war

The GBP/AUD exchange rate is trading higher at around 1.8106 at the time of writing on Tuesday, adding to the previous week's 1.55% gain.

Overnight moves lower in the Aussie Dollar follow comments from Reserve Bank of Australia Deputy Governor Guy Debelle who said further AUD depreciation "would be helpful".

Furthermore, Debelle suggested the RBA are very active in their thinking on how low they can afford to cut interest rates, saying: “if you look at what happened in the U.S., Canada and the U.K., when they got down to their lows it was somewhere around about zero, quarter, half a percent. And so I think that probably gives us some sort of guide as to what the equivalent might be here.”

He adds: “it’s a good question, it’s one we’re spending a fair bit of time thinking about, hopefully a question that we don’t actually have to, in the end, worry about. But there’s some chance obviously that we do.”

Expectations for lower interest rates at the RBA have kept the Aussie under pressure over recent months, and the comments only feed into this narrative further. "The rhetoric has slowly shifted to contemplate rates close to zero more openly. Our AU rates team expect the cash rate to reach 0.5% by early 2020," says Adam Cole, a foreign exchange strategist with RBC Capital Markets.

Our technical studies of the GBP/AUD pair are marginally biased to further gains in the short-term, although in the long-term the trend is less clear and subject to confirmation from a break above or below key levels.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair has risen back above the major trendline it temporarily broke below.

This suggests the short-term trend has flipped and is arguably bullish now, and likely to continue higher to the June highs at 1.8425.

We see gradually more confirmation for trend extension coming as the pair breaks above 1.81, 1.82, and the 1.8336 August 26 highs.

The daily chart shows how the pair has come down and found support at a major trendline before recovering.

Although the recovery is not very strong, a break above the June highs would confirm a probable continuation higher to a target at around 1.8700.

The daily chart is used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead.

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 with even wider, longer-term targets higher or lower depending on which side the breakout occurs.

A break above the June highs could lead to a move up to a target at the 1.8850 May highs.

Alternatively, a break below the 1.7560 July 30 lows could lead to a move down to a target at 1.7225.

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The Australian Dollar: Key Drivers to Watch this Week

The main driver of the Australian Dollar in the week ahead is expected to be the evolution of trade tensions between the U.S. and China because of Australia’s deep trade ties with China.

Trade negotiations took a turn for the worse last week when the Chinese announced a new set of tariffs on U.S. goods of between 5% and 10% to be implemented at the start of September, and a U.S. auto tariff of 25%, as well as a tariff of 5% on spare parts.

In retaliation, Donald Trump threatened to slap even higher tariffs on Chinese imports, increasing existing tariffs from 25% to 30%, and threatening to increase expected tariffs of 10% earmarked for another $300bn of Chinese imports, to 15%.

At the G7 summit, Trump said the Chinese negotiators had called and were desperate to return to the negotiating table to hammer out a deal but this was later contradicted by the Chinese.

“China called last night our top trade people and said ‘let’s get back to the table’ so we will be getting back to the table and I think they want to do something. They have been hurt very badly but they understand this is the right thing to do and I have great respect for it,” Trump said.

Yet later he was contradicted by the editor of one of the largest newspapers in China who said Trump had over-exaggerated the content of what had been essentially “technical” calls.

Hu Xijin is the editor-in-chief of the Global Times said the two sides did not hold phone talks recently, adding that Trump is exaggerating the significance of the “technical level” contacts.

“The two sides have been keeping contact at a technical level, it doesn’t have significance that President Trump suggested,” said Xijin on Monday. “China won’t cave to U.S. pressure.”

If the trade war gets worse in the week ahead the Aussie is in the front line of currencies which will suffer.

On the hard data front, the main release for the Australian Dollar is second-quarter capital spending by businesses, or Capex - a favoured barometer of growth.

Private sector Capex is forecast to show a 0.5% rise (quarter-on-quarter) in Q2, from -1.7% in Q1, when released at 2.30 BST on Thursday, August 29.

“Turning to the commodity-linked currencies, Australia’s capital expenditure for Q2 is coming out on Thursday, and forecasts point to a rebound. If so, that could dispel some expectations for more RBA rate cuts this year, and perhaps help the battered aussie recover some losses. That said, the currency’s overall fortunes are linked to the trade war,” says Marios Hadjikyriacos, investment analyst at XM.com.

The Pound: What to Watch

The main driver for the Pound in the week ahead is likely to further speculation over Brexit and we will be looking for an improved atmosphere between the UK and EU to aid further gains.

Over the weekend Prime Minister Boris Johnson said at the G7 Summit in France that a ‘no-deal’ Brexit remained a “touch and go” prospect, but he expressed satisfaction that European leaders appear increasingly willing to talk.

Above: Sterling was the best-performing major currency last week

Sterling rallied last week as EU leaders sounded a decidedly more constructive tone on looking for a way around the impasse posed by the Northern Irish border question: Johnson wants the Irish border 'backstop' completely removed from the existing Brexit deal, while EU leaders have previously said the issue was not up for negotiation.

Germany's Chancellor Angela Merkel and France's President Emmanuel Macron last week suggested there was 30 days for the UK to come back with realistic alternatives to the backstop that would ensure the border stays open.

“We can find a solution to the backstop by October 31…we can work on finding a regime that keeps the Good Friday Agreement and also ensures the integrity of the single market,” said Merkel at an event in the Hague.

Macron's suggestion that the backstop can be tweaked is however arguably the more important communication of the day as it would appear to be the first time an EU leader has deviated from the long-held line that the Withdrawal Agreement cannot be reopened.

"It is just what Michel Barnier has negotiated can be amended while complying with the integrity of the single market and the two goals I mentioned, then we can find a solution," Macron said during a visit by UK Prime Minister Boris Johnson to Paris.

The risks of a ‘no deal’ have increased since Prime Minister Boris Johnson came into power and there will remain uncertainty as to whether the UK can present proposals acceptable to the EU, which should keep any advances in Sterling limited.

"Personally I don't see the the recent Sterling optimism regarding the backstop, clearly the market is just reducing shorts & unwinding hedges. Solid longer term interest we estimate will remain on the sell side. I suggest the market reassessing the content of Boris Merkel & Macron backstop comments this week," says Neil Jones, a currency trader at Mizuho Bank in London.

There is an added risk Boris Johnson may call a general election in the coming weeks in order to increase his majority so he has more power to enforce a Brexit on his terms.

His recent spending pledges were seen as paving the way for such an event.

Calling an election would likely keep the pressure on Sterling as the currency tends to underperform heading into General Elections owing to heightened uncertainty.

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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