The RBA dominates the domestic agenda for AUD in the coming week. Image © ArchivesACT, Reproduced under CC Licensing, Editorial, Non-Commercial

- GBP/AUD rises to top of key technical range

- Sterling now poised to breakout higher

- Sterling eyes potential Brexit vote risk

- RBA meeting eyed by AUD

Pound Sterling is configured for further advances against the Australian Dollar on a technical basis, but the two key fundamental risks to keep in mind are a potential parliamentary vote on the Brexit deal in the UK and the Reserve Bank of Australia's March policy meeting.

The Pound-to-Australian Dollar exchange rate is trading at 1.8642 at the start of the new week after rising 1.80% in the previous week; the pair's advance in 2019 now stands at 3.07%.

The gains come largely on easing Brexit fears with markets increasing bets the Brexit deadline will be delayed, reducing the probability of a no-deal Brexit on March 29.

The technical outlook is bullish given the established uptrend. The pair has risen to the top of a range at 1.6725 and is now knocking on the range ceiling. In the week ahead there is the possibility the pair could breakout higher. A move above 1.8775 would probably confirm a breakout from the range and trigger an upside target at 1.9590, based on the height of the range extrapolated.

The 50-day moving average (MA) has just broken above the 200-day MA in what analysts call a 'golden cross’ - a rare bullish configuration which also augurs substantial upside for the pair. The golden cross is further enhanced by the shallow nature of the crossover which tends to increase the probabilities of the bullish signal. More ‘right-angled’ crossovers tend to be less reliable.

The 50-month MA had been capping gains at 1.8329 with repeated attempts at an upside break rejected, however, the exchange rate has finally successfully broken out above the 50-month MA in February, and this is a very bullish sign for the pair. The fact the break was on a closing basis was particularly bullish.

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The Australian Dollar: What to Watch this Week

The Aussie remains a proxy for investor sentiment towards Asia, and China in particular. We would remind readers that sentiment regarding the U.S.-China trade negotiations have a strong role to play in the currency's performance and we continue to keep an eye on further developments on this front.

2019 has seen more good than bad news on the matter, with both China and the U.S. committed to reaching a deal. The Wall Street Journal reported Sunday that negotiators are close to reaching an agreement that could see existing White House tariffs on Chinese exports to the U.S. removed.

There is still scepticism among analysts over whether a deal will be reached and if it will last, assuming something is eventually agreed, but for now markets are trading under the assumption that the trade war between the U.S. and China could well end in March.

"The Huawei issue still signals serious US-China and Chinese-Canadian tensions, and markets should focus on that rather than the noise of the nth iteration of a Panglossian WSJ trade article. Moreover, Huawei also signals serious US-EU tensions that markets had better wake up to," says Michael Every, a strategist at Rabobank.

Reports of progress in talks to end the trade war came around the same time the Australian Bureau of Statistics said that building approvals had risen 2.5% during January, after having declined by a mammoth -8.1% back in December. Approvals were down -28.6% for the year to January 2019 though.

"The overall trend in approvals remains soft, but it is slightly encouraging that the pace of declines at the end of 2018 hasn’t continued. Nevertheless, the number ofapprovals remains well below where they were a year ago. While the amount of work yet to be done remains elevated, the fall in the level of building approvals will weigh on construction activity this year and next," says Felicity Emmett, an economist at Australia & New Zealand Banking Group.

The main domestic event for the Australian Dollar next week is the Reserve Bank of Australia (RBA) rate decision on Tuesday at 3.30 GMT. Markets have been overall quite pessimistic about the RBA. From expecting the next policy move to be to raise rates they now fear the RBA may cut them.

“The RBA, which will announce its latest policy decision on Tuesday, is expected to keep rates on hold but may backtrack on its overoptimistic 2019 growth predictions of around 3% if the GDP data comes in line or below expectations. A dovish RBA and disappointing growth figures could weigh heavily on the Aussie,” says Raffi Boyadijian, an economist at broker XM.com.

Fourth quarter GDP data is out at 00.30 on Wednesday, and could very well move the Aussie Dollar if it is higher or lower than forecast. Growth has been especially slow recently so the bias is to expecting growth to slide lower. The main catalyst for the slowdown is the knock-on effect of declining Chinese growth, which is a major trading neighbour.

Analysts estimate a 0.4% rise compared to Q3, when it rose 0.3%. It is forecast to rise by 2.6% compared to a year ago, when it showed a 2.8% rise. A deeper decline would hit the afflicted Aussie.

The week begins with key housing data too. On Monday at 00.00 new home sales and building permits are released. Both saw substantial declines of between 6-9% in the previous month.

Further weakness could hit the Aussie since housing is a headwind for the whole economy because it provides the basis for most people's wealth. It is a key input in the RBA’s decision making and if the data is poor it will lower even further interest rate expectations. Lower rates tend to weaken a currency by making it less attractive as a destination for foreign capital inflows.

The Pound: What to Watch this Week

The main releases for the Pound next week are services and construction PMIs for February, although, the possibility of an early meaningful vote on Theresa May’s latest Brexit deal remains an overarching risk.

If Theresa May can win concessions from the EU on making the Irish backstop temporary, she may bring forward the meaningful vote before the March 12 deadline date, which means it could happen as soon as next week.

Due to political manoeuvring, any deal she agrees has a higher chance of getting voted through than was the case in January when the deal was shot down by parliament. Brexiteers fearful of Brexit being reversed could be more prone to back May, provided she can get a legal concession on the backstop.

Last week Sterling rose sharply after the Prime Minister announced a series of votes would take place in the event of her Brexit deal being rejected: one of them would be a vote on requesting a delay to Brexit.

With parliament heavily skewed against a 'no deal' Brexit, markets expect a delay to be requested should May's deal fail: for Brexiteers such an outcome would be incredibly problematic as it could open the door to a series of events that results in a much 'softer' Brexit, or no Brexit at all. Suddenly May's Brexit is looking a whole lot more attractive. Last week we heard Jacob Rees-Mogg, the head of the European Research Group which is a cabal of Brexiteer Conservative Party MPs, was softening his stance on the changes required for the deal to get his backing.

“British Prime Minister Theresa May could bring the meaningful vote on her Brexit deal to Parliament early before the March 12 deadline if she manages to secure the legal assurances she is seeking from the EU that the Irish backstop would be temporary if triggered,” says Raffi Boyadijian, economist at broker XM.com. “There seems to be growing movement within MPs, particularly among Eurosceptics, to back the deal if May obtains the legal guarantee after she offered lawmakers a vote on ruling out a no-deal scenario and extending Article 50. Labour’s backing of a second referendum also rattled hardline Brexiteers who may now fear Brexit could be postponed or even aborted.”

The other main release for the Pound is services and construction PMIs. Construction is the first to be released, on Monday at 9.30 GMT, and is forecast to slow to 50.3 from 50.6 previously.

Services is out on Tuesday at the same time and is forecast to come out at 49.9 from 50.1 in January. The services sector accounts for over 80% of UK economic activity and is therefore the survey markets are most interested in and has the greatest market-moving potential.

PMIs are surveys of pivotal purchasing managers in companies within the target sector. They are a leading indicator for the economy. A lower-than-forecast result could weaken the Pound. The possible dip below 50 for the UK’s key services sector is particularly concerning since 50 is the dividing line between growth and contraction. Brexit is not the only determinant of Sterling. Now that fears of no-deal have eased economic data is playing a greater role too.

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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