A changing outlook for the Australian Dollar, a short-term overbought Pound, and charts which suggest more downside are making the GBP/AUD a seductive sell candidate.

The Australian Dollar, which is currently making an impressive comeback, is going to continue strengthening against the Pound, according to a note from Faraday Research, a trading and investment advisory service based in London.

The currency's fortunes turned around at the start of December following "stellar employment data," and it's now poised to go higher; whilst the Pound is looking toppy in the short-term after appreciating a strong 9.53% (versus USD) in 2017.

The combination of a Pound at risk of falling and an Aussie Dollar on a run could be music to the ears of Pound-Aussie bears.

But that's not all: from a technical POV the recent trendline break lower signaled a new downtrend and this has been reinvigorated more recently after a pull-back by a bearish engulfing candlestick pattern.

Bearish engulfing's occur when a day's range fully engulfs the previous day's range - which formed on Wednesday (yesterday) and signaled a resumption of the downtrend (see below).

The bear trend is likely to extend into fresh new territory below the December 27 lows at 1.7213 on a break of those lows, says Faraday Research's Analyst Mathew Simpson.

"So our attention now shifts to 1.7211, as a break beneath the December low opens up a potential run for 1.6896-928," says Simpson.

The bearish forecast is in tune with our own recent technical forecast for the pair, the only difference being that our target was slightly nearer at 1.7000.

We based our bearish forecast on the signal given by the breakout from the rising channel the pair was in since September.

"The usual way to forecast how far the exchange rate will fall after a channel breakout is to take the height of the channel (labeled 'a') and extrapolate it lower (labeled 'b') to get the expected target, which yields a target just below 1.7000," I said in the article.

Fundamental Change

It's not just technical's which support a more bearish view of the pair - fundamental's are also changing.

An increase in environmental regulation of metal mining and smelting in China has resulted in a cut in the supply of industrial metals such as copper, aluminum and iron ore, all of which are also major commodity exports from Australia.

The supply cuts have resulted in a surge in metal prices with copper futures kicking off the new year at a new peak of $3.30 from 2.92 at the beginning of December 2017 - a rise of nearly 20% in only a month.

Commodities have been relatively cheap for a long-time and are ripe for a rally, and with China on a drive to clean up its environment increasing regulation could continue to aid price rises.

Higher metals prices are likely to strengthen the Australian Dollar because they increase aggregate demand for Aussie exports, helping to increase the country's balance of payments surplus.

There are risks in the medium-term, however, that the Reserve Bank of Australia (RBA) may try to manipulate the currency lower via verbal intervention, so as to help exporters.

"Medium term I do not see much more upside scope in AUD-USD now. Not just because USD is likely to recover further but also because I would not exclude that at its next meeting the RBA might intensify its rhetoric on the exchange rate again," says Commerzbank Analyst Thu Lang Nguyen.

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