Pound / Australian Dollar: 1.8355 in the Headlights; RBA Rate Meeting on Tap

A busy week lies ahead for both the British pound and Australian dollar. We consider the key events to watch and ask what the most likely direction of travel in the GBP/AUD exchange rate will be.

The GBP to AUD pair’s longer-term down-trend remains intact.

The break below the March 23 lows has seen the pair move to a new low of 1.8487 achieved in the previous week.

The broader down-trend is expected to extend, and the next target is at the S1 monthly pivot at 1.8355.

The down-trend reflects the pound’s weakness due to growing unease over the fall-out from a possible Brexit following the June 23 referendum.

Recent UK Current Account data showed the widest deficit since 1955; the main culprit was a fall in demand from foreign investors.

The inference is that investors are shunning UK assets because of potential risks on the horizon.

The pound had a stinker of a week gone by, being the second worst performer in G10 after the US dollar.

We note too that FTSE 100 was also under notable pressure on the first day of the new month which confirms to us that the UK currency continues to echo moves on the UK’s leading stock index again.

There has been a noted correlation, albeit a loose one, between the FTSE 100 and the pound over recent months.

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Therefore general risk sentiment could be a key driver over the course of the coming week.

The week ahead in the UK is dominated by the release of the Construction and Services PMI readings.

Monday April 4 sees the release of Construction PMI, which is expected to decline further to 54.0 from 54.2 in February.

This would be in line with the general down-trend for results since the peak in 2013, and would also constitute a more than 18-month low for the metric.
Construction PMI Pic

The key data release for the UK comes mid-week when the Services PMI figures are released.

Services account for in excess of 80% of UK economic output, it goes without saying this will be a much-anticipated release.

Australian Dollar’s Week Ahead

The main event for the Australian Dollar is the Reserve Bank of Australia (RBA) April policy meeting on Tuesday April 5.

Most analysts do not see a very high chance the RBA will cut interest rates again as Australian domestic economic data has been quite positive since the previous meeting when the RBA said future policy depended on how economic data came out.

The Unemployment Rate, for example, fell from 6.0% to 5.8% in February, which removed any lingering doubts the RBA might feel the need for further easing.

Central Banks use easing to stimulate the economy when it is depressed. Their main tool is to manipulate interest rates.

By ‘easing’ it is generally meant that the central bank reduces interest rates to make borrowing cheaper.

This is hoped to increase borrowing by businesses and households and stimulate economic activity.

Securities Broker TD Securities say the RBA may now be concerned about the rise in the Aussie, which has been mainly stimulated by a mixture of a recovery in commodity prices and Fed back-tracking on interest rate hikes.

This also chimes with comments from RBA governor Stevens, who when asked at an ASIC event whether he thought the AUD warranted its new level elevated plane of activity in the 0.77s, answered:

“Unless you think that the commodity price trend now is different and we are heading back to a world of considerably higher prices for an extended period, and you think the Fed is never going to lift rates, it is not clear that that situation will warrant a much higher exchange rate than this and there is some risk actually that the currency might be getting a bit ahead of itself”.

If these comments are reflective of the board in general, then we may see a mention in next week’s RBA statement that the Australian Dollar may be ‘getting a bit ahead of itself’ or words to that effect. This may have a sobering effect on the currencies relentless climb.

It is unlikely, however, that a major policy decision will be made, such  as another 0.25bps cut in rates.