GBP to Australian Dollar Must Break 2.06 for Confirmation of Next Major Move Higher

australian dollar rate

The pound to Australian dollar exchange rate is trading near multi-month highs at the start of the new week and we maintain a constructive tone concerning the outlook.

GBP/AUD has risen for six weeks in succession now and in the process has triggered a number of bullish signals which has encouraged ever more traders to chase the pound higher.

Nevertheless, we have expressed some concern for some time now that the GBP is overbought against the Aussie. At the start of the new week we maintain these concerns and note the pair has formed a bearish engulfing candlestick pattern which is a mildly bearish sign, and could signal more downside in the short-term.

The 200-day moving average (MA) situated at 2.0538 has caped gains and is preventing further upside. The 50-week MA (not shown on the chart below as it is daily) is also acting as an obstacle to further upside, as it too is situated at 2.0496.

Only a clear break above 2.0600 would indicate these moving averages had probably been passed, opening the way up to further upside towards the next target at 2.0670, at the level of historic highs.

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The Aussie is expected to continue on the back foot in the coming week as concerns about falling inflation weigh. 

The Reserve Bank of Australia (RBA) is likely to cut rates again, although most forecasters don’t expect this to happen until August.

In the week ahead all eyes will be on GDP with markets forecasting a 0.7% reading. A rise would support the Aussie. 

“Consumption and inventories (+0.2% each) and trade (+0.7%) to be offset by business investment (-0.5%) overall leaving Q1 GDP growth of around +0.8%, in turn lowering the annual rate from 3.0% back to trend 2.8% y/y,” say TD Securities in a brief ahead of the release.

The price of iron may be a focus, as it has fallen from highs of $61 a tonne in April to $50 in May. Iron ore is Australia’s number one export but it is suffering from falling demand in China. Any further declines are likely to weigh on the Aussie.

Another major release in the week ahead is Retail Sales, on June 2, with analysts’ forecasting a 0.3% rise.

“Aussie consumers did not spend any of the petrol savings in Q1, so perhaps they saved for an Easter splurge. However, as confidence plummeted in April (-4%) perhaps we wait for a post-RBA cut spending spree,” say  TD Securities.

The Trade Balance on June 2 is another major event for the currency, with investors expecting a -2.1bn result.

“We expect a sharp narrowing of the trade balance via a jump in exports via higher commodity prices, as well as a pickup in volumes. Imports are flat as a pickup in oil exports is offset by a soggy services sector,” say TD Securities.

The Week ahead for Pound Sterling

The main event will be the triumvirate of purchasing manager surveys (PMI’s) released, including Manufacturing, Services and Construction. 

The fall below 50 in manufacturing PMI in the previous month of April was a particularly negative sign, which shows that the manufacturing sector is contracting (over 50 = expansion; under 50 = contraction).

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If PMI’s for May continue to show weakness this will probably weigh on the pound because it will lower the possibility that the Bank of England (BOE) will raise interest rates sooner than expected.

Higher interest rates support a currency as they increase capital flows into the country due to the higher return offered.

Some analysts have argued that the fall in PMI’s is as a result of Brexit fears, which have contributed to a fall in direct foreign investment. If they are right then PMI’s should bounce back if the referendum vote returns a Stay win, as bookmakers still probably expect.

If PMI weakness is not due to Brexit concerns, however, then Economist Roger Bootle, argues it could substantially delay interest rate expectations, as PMI’s are currently at such a low level which, “in the past has often triggered interest rate cuts from the MPC.”

FX Markets: Dollar Still in Charge

The US dollar index (weighted against a basket of currencies) rose on Friday night, hitting a two-month high after Yellen’s comments.

The US dollar gained ground against the Japanese Yen, with USD/JPY rising from 109.48 to currently trade around 110.49.

The Euro weakened against the US dollar, with EUR/USD falling from 1.1201 to trade around 1.1113 at the time of writing.

The Australian dollar lost ground against the US dollar, falling to a low of 0.7172 before stabilising around 0.7180 at the start of the new week.