- GBP/AUD seen breaking clearly out of clear down trending channel

- 1.7900 now in focus as a potential upside target

- Inflation and wage data matter for Sterling, markets look for 16K reading in Aussie employment data

The Pound-to-Australian Dollar rate has brought into severe doubt the dominance of the short-term down-trend after reversing and breaking out of a descending channel on the daily chart.

The MACD momentum indicator - which pretty much does what it says on the time i.e. show where momentum lies - in the lower pane has also crossed its signal line providing a complementary bullish signal.

The pair appears to have reversed higher having fallen down to the 200-day moving average (MA) where it based and found support. It then rotated and moved higher as buyers stepped into the market.

A breakout of a descending channel normally suggests a follow-through of the same length as the height of the channel extrapolated higher. In this case, the channel is roughly 31 basis points high and this extrapolated higher from the breakout point gives a target just above 1.7900.

Based on this forecasting method the exchange rate will probably move up to 1.7900, with a break above the current 1.7734 highs providing confirmation.

The weekly chart is showing corroborating bullish evidence in the form of a hammer candlestick which has formed this week. Hammers are bullish Japanese reversal candlesticks.

The monthly chart is the only timeframe on which the pair does not look bullish - rather if anything it is showing medium-term bearish signs.

The long-term trend since the 2015 highs, for example, is down, and the correction since the October 2016 lows could be characterised as rather weak and shallow suggesting it may break down soon and the longer-term downtrend may resume.

The rotation or 'pivot' which occurred after the pair peaked in March showed a strong bearish down month in May and looks rather bearish but it is not a perfect three-month pivot since the peak actually occurred in March nor April, so it does not negate our short-term call for a rise up to 1.7900.

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The Pound this Week: Big Data Releases

Monday, June 10

Manufacturing production numbers are out, and markets are looking for the month-on-month reading for April to read at 0.3%, taking the year-on-year number up to 2.9%.

Any disappointment might hurt Sterling as markets are looking for economic data to start reflecting a pick-up in activity into the second half of the year, which could ultimately lead to an interest rate rise at the Bank of England in August.

Should expectations for an interest rate rise is August increase over coming weeks, on the back of improving data, the Pound should ultimately find more support.

Tuesday, June 11

This is the big one for Sterling.

The ONS will release employment and wage data at 09:30 which will in turn be closely watched by policy-setters at the Bank of England.

Average earnings, bonus included, is forecast to read at 2.6%, a beat on this should help Sterling find a bid as higher inflation = higher inflation on the horizon = higher interest rates at the Bank of England.

For Sterling, a beat on this 2.6% figure must be delivered if it is to go higher.

"However, recent outturns of pay growth – as captured by the 3M/3M growth rate – suggest the underlying trend in pay growth has fallen back recently," warns a preview note of the event released by economists at UniCredit Bank.

Wednesday. June 12

Another big day for Sterling as actual inflation numbers are released and the same dynamics as described above apply.

Headline inflation is forecast to read at 2.5% on an annualised basis, up from 2.4% in the previous month.

Clearly inflation is heading in the wrong direction for the Bank of England which is targeting a 2.0% inflation rate, and should the number beat 2.5% expectations for an interest rate rise will surely be ushered forward.

Be careful to watch the core CPI number - this is arguably more important than the headline number as it accounts for organically generated price rises that reflect economic growth dynamics.

Core is forecast to read at 2.1% a hit or miss against this number will likely move Sterling.

Thursday, June 13

Retail sales numbers are out, and with markets focussing on data once more, Sterling could react to any surprises.

Expectations are for UK consumers to be finding their feet again following a tough start to the year.

Retail sales are forecast to read at 0.6%.

Australia this Week: Employment Numbers

What matters for the Aussie Dollar right now is when the Reserve Bank of Australia will next raise interest rates; a move that would increase the return on Australian financial products which in turn attracts the inflow of foreign capital which bids up the value of the currency.

Australia continues to enjoy strong economic growth as evidenced by the release of GDP data last week, but there is a concern: wages aren't rising as fast as the RBA would like.

Clues on future wage dynamics will be given by this week's employment numbers - a strong reading will hint at future wage increases, which could prompt an increase in expectations for higher interest rates at the RBA.

Market consensus is forecasting a reading of 18K in the employment change for May, down on the 22.6K result given for April. The unemployment rate is forecast to tick down to 5.5% while the participation rate is forecast to read at 65.6%.

"The labour report should show conditions continuing to tighten. If the unemployment rate drops, as we expect, the AUD should get a short-term boost," says a note from the foreign exchange strategy team at Australian lender ANZ.

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