The GBP to AUD exchange rate should maintain an upside bias with a suite of technical indicators advocating for further gains.
The May rally in GBP/AUD has reached just short of the 200-day moving average (MA) at 2.0450 - a significant barrier in which we would expect significant resistance to further advances.
Market participants will setting sell orders around the moving average in anticipation of a reversal in the currency pair's advance.
The exchange rate is pulling back mildly now but we nevertheless expect the push higher to resume, quite possibly in the coming week.
Ideally we would like to see a clear break above the 200-day, signalled by a move above 2.0550, before getting more bullish again.
Such a break would be expected to extend at least as far as the 2.0671 February highs.
More Australian Dollar Weakness Ahead Warn Interest Rate Charts
The Aussie has a downside bias caused by heightened expectations that the Reserve Bank of Australia (RBA) will cut interest rates again.
Lower interest rates mean less foreign investors choose Australia as a place to park their capital as they earn less interest.
The Australian dollar started falling in March when the RBA surprised markets by deciding to cut interest rates to 1.75%; and inflation data showed a surprise tick down to 1.3%, well below expectations of 1.7%.
Recent lacklustre macro data and the stalling in the commodities rally (Australia is heavily resource dependent) has led to expectations of a further cut, with most analysts agreeing that August is in the frame for a further rate cut to 1.50%.
Australia's high interest rates - the second highest interest rates in the G10 after New Zealand - has favoured the Aussie.
Consider where investors in the Eurozone (0.0%), the UK (0.50%) and the US (0.25-0.50%) would send their money were they able to receive yields of 1.5%.
Judging the likely direction of the Australian / US dollar exchange rate is therefore often an exercise in following the movement in the difference between US and Australian 2-year interest rate differentials.
There’s been a lot of bouncing around in AUD/USD but for now, after the RBA eased and the FOMC started hinting at impending interest rate hikes:
"AUD/USD looks set to make new multi-year lows. It is, once again, the standout trade for anyone looking to position for more sluggish Chinese economic data and to hedge for any renewed speculation of another shift in Chinese currency policy," says Kit Juckes, analyst with Societe Generale.
The stronger Australian Dollar, however, is an impediment to export competitiveness and been unhelpful in adjusting the economy to a less resource and commodity led model.
Iron Ore is Australia's leading export and whilst a rebound in iron prices supported the Aussie in Q1, there is little faith in them continuing much higher.
Now it appears Iron Ore has stalled its 78 dollar highs.
The recovery in Iron Ore Prices which say them nearly double in price from their lows of 38 dollars per tonne in December 2015, was discovered to be primarily driven it seems by mass speculation on Chinese futures exchanges, which witnesses more contracts traded for purely speculative purposes in a single day, than would account for an entire year’s imports of Iron Ore for the whole of China.
Apart from high Australian house prices, which is particularly notable in Sydney and Brisbane, there is little to hold back the RBA from cutting rates further, especially as it still sees the Aussie overvalued in relation to its fundamentals.
British Pound Finds its Feet
In the short term there is a chance the pound may pause in its Brexit-loss recouping upswing, now that it has regained a substantial amount of ground.
According to the BOE, who estimate Brexit losses to have amounted to about 5% of the fall in sterling in the last 6-months, that loss has now almost completely been reabsorbed at the current 1.46 level.
Other estimates which place the premium higher, such as UniCredit’s 8% of Sterling’s losses, which would require a move back up to 1.49 to recover, indicate more upside may still be in the pipeline - indeed it’s hard to believe that at current levels everything has been reabsorbed before the referendum has even taken place!
What does seem possible is that the ‘low hanging fruit’ of Brexit losses may now have been picked and the remainder of the risk premium may be harder to reach. Still CFTC data from US Futures Exchanges is still showing a predominance of short Sterling positions still remaining after they reached a record high at the height of the Brexit bear market, which could still fuel a short-covering rally higher.
The current pull-back in the pair may simply be an acknowledgement that commodities have not capitulated as many analysts had expected, and much Brexit risk has now been recouped, leaving further drivers higher dependent on fresh stimuli.
Now that concerns about Brexit have calmed down with the ‘Remain’ campaign comfortably in the lead, attentions are being turned to more quotidian concerns of when the UK central bank will decide to raise rates (or indeed possible cut them).
In this sense the UK is in a similar position to the US where attentions are being concentrated anew, on data, so as to gauge growth; likewise, in the UK something similar has been starting to happen.
Much was made of Thursday’s rip-roaring Retail Sales release as it helped dispel fears the UK economy was rapidly disintegrating.
April Manufacturing PMI actually came out in contraction mode for the first time in years, and Q1 growth was lower than the eurozone, therefore analysts will be awaiting UK Q1 GDP second estimates on Thursday with much anticipation.
It is not expected to be revised from the current 0.4%, but if it is, either up or down, this will probably impact rate hike expectations and therefore the pound.
There is no tier one data out for the Aussie in the week ahead, and of the second tier variety there is only ‘Construction Work Done’ and ‘Private New Capital Expenditure’, neither of which are expected to Rock the Kasbah.
As we have already noted the key release for the pound is Q1 GDP second estimate on Thursday 26, with analysts expecting no-change from the 0.4% first estimate.