Image © Greg Brave, Adobe Stock

- Uptrend expected to extend

- We are watching major technical ceiling which could hamper advance

- Politics to dominate Sterling outlook; for Aussie business sentiment data

The Pound-to-Australian Dollar exchange rate will start the new week trading at 1.7874 having fallen over 0.6% during the previous, highly volatile, week.

Last week the exchange rate surged temporarily to above 1.8280 during a 'flash-crash' event that saw Australia's Dollar hit particularly hard, although the Pound's gains were almost as quickly returned once the market calmed down.

The pair is in a short-term uptrend consistent with a longer-term underperformance by the Australian Dollar. However there are notable technical levels at hand which are likely to present obstacles to further upside.

One such level is the 200-week moving average (MA) situated at 1.8260 - too close to the peak of last week's spike high to be a coincidence - and almost certainly a major ceiling level to watch in the future. Any more upside is likely to meet repeated firm resistance at that level in the future.

At the same time, it is also clear from the weekly chart above, that the exchange rate is also constrained to the downside by the floor presented by the 50-week MA, at 1.7890. That the pair could begin trading in a sideways range between these two major obstacles is quite possible during the next few weeks.

The daily chart above looks more bearish after the formation of a clear bearish shooting star Japanese candlestick pattern at the highs was followed by a long down-day on Friday. Taken together these for a bearish duo and suggest further downside on the horizon.

The location of the 50-day MA at 1.7776, however, places a floor under potential losses; although the 200-day at 1.7910 looks to have already been broken with ease.

The four hour chart shows that the short-term uptrend is more clearly bullish, although the pull-back at the end of last week from the plus 1.82 highs was so sharp and deep it raised legitimate concerns.

The pair ended the week trading right on a key distinguishing line used by technical analysts to determine the direction of the trend, which is at the last lower high before the peak, in this case at the 1.7860 boxing day lows.

If broken this will be another nail in the coffin of the uptrend and suggest bearish bias in the short-term, however, as long as it holds the short-term trend has a bullish bias, and is more likely to recover to the 1.8280 highs and extend.

Overall, we are mildly bullish, although to gain conviction we would first like to see a break above the 1.8280 highs, achieved during the flash-crash. Such a break would open the way to a continuation of the bull trend up to the next target at 1.8300, followed by 1.8400.

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The Australian Dollar: What to Watch this Week

The Australian Dollar come under intense pressure in the previous week after fears of a slowdown in China - it's largest trade neighbour - led to a flash-crash which saw the Aussie Dollar hit particularly hard.

We expect the China story to be remain a major driver of the Aussie Dollar for the foreseeable future. Chinese inflation data out on Thursday, may impact on the currency.

“In addition to domestic data Aussie traders will also be keeping an eye on producer and consumer inflation figures due on Thursday. China's producer price index (ppi) is expected to have moderated further in December to an annual rate of 1.6% highlighting further the weakening factory demand for raw materials,” says Raffi Boyadjian, an analyst at broker XM.com. If he is right, a negative result could add further headwinds for AUD, since much of the ‘raw materials’ in question come from Australia.

It is often said sentiment data is an early indicator for the economy, so the release of the NAB business confidence data for December, may be the most important domestic release for the Australian Dollar this week, when it comes out at 00.30 GMT on Thursday, January 10.

The metric has declined steadily from 12 to 3 over the course of 2018. A further decline, given the negative backdrop, will probably put pressure on the Aussie.

Another key release will be retail sales in November, out on Friday at 00.30, which is forecast to show a rise of 0.3% from 0.4% in the previous month.

Apart from that, other domestic data for the Aussie includes AIG services out at 10.30 on Tuesday, building permits at 00.30 on Wednesday and the AIG construction index, out at 10.30 on Thursday.

The Pound: What to Watch

The UK enters a critical three week period as parliamentarians return to Westminster to debate the merits of the Government's withdrawal deal with the EU. A vote is due in the week commencing January 14.

At present, the deal is expected to be voted down by legislators amidst a lack of fresh concessions from the EU. The government is expected to bring the deal back before parliament for a second vote in the event of the first vote failing.

However, any second vote must contain some material changes, so we expect the EU to offer something in the near future as they will know only too well that the deal they worked on over the past 2 years will not pass in its current form.

Sterling will likely trade relatively subdued, range-bound levels until the point it becomes clear that either 1) May's deal will pass or 2) a No Deal Brexit is going to happen in March 2019. We will be watching the newswires for any indications that a decisive shift in either direction has occurred.

The Pound's rise on Friday was in part driven by the release of better-than-expected services sector data, but in the week ahead the focus will be more on the heavier parts of the economy with industrial and manufacturing production data for November scheduled for release, as well as, of course, GDP.

Industrial production is forecast to end a 3- month losing streak in November, when it is released at 10.30 GMT, on Friday, and forecast to show a 0.2% rise. Manufacturing is forecast to show a 0.4% gain when it is released at the same time: these would contrast with -0.6% and -0.9% respectively in October.

Monthly GDP data for November is also out at the same time on Friday and is expected to show a 0.1% rise month-on-month, the same as it did in October, and a 1.3% rise year-on-year.

Despite growth in the UK being weak, it remains about the same as in the Eurozone.

“Despite the Brexit gloom and gridlock in Parliament over the withdrawal deal, the UK economy does not seem to have slowed down anymore than its European counterparts and probably managed growth of 0.1% in November, estimates are anticipated to show.” Says Rafi Boyadjian, an analyst at broker XM.com.

The other key economic release for the Pound is trade balance data, also out on Friday.

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