Australian Dollar Could Come Under Pressure Against Sterling This Week

The Australian dollar (AUD) retains a positive tone which will be tested this week by a number of key data releases.

The pound sterling continues to look heavy against the Aus dollar over the medium term with momentum indicators suggesting further declines are possible.

However, there is reason to believe that a relief rally could be due owing to a settling of uncertainty over the EU referendum with both a preferred ‘In vote’ date being set and latest polls showing an ‘In vote’ is likely.

Recent history does however tell us that relief in sterling is ultimately short-lived with bounces in the GBP to AUD conversion typically giving way to deeper declines.

The Australian Dollar’s Week Ahead

The week kicks off with commentary from Deputy Governor of the RBA Guy Debelle, who is giving a speech in Sydney.

This may be heavily scrutinised, and be more of a major event for the markets than previously expected.

Recent poor employment data has once again put the possibility of a rate hike back on the table, so analysts will be tuning in to the speech for hints as to if or when the RBA is considering a rate cut.

In a recent note, Goldman Sachs forecast a rate cut to 1.50% in 2016, with a cut as soon as May, followed by another in July.  

The Wage Cost Index (Q4) on Wednesday could also cause some volatility, as a fall in the cost of wages will weigh on the inflation outlook, and increase the likelihood of a rate cut further.

Apart from that there are two middle tier releases – the Westpac MNI Consumer Sentiment Index (Feb) on Wednesday, and Private Capital Expenditure (Q4) on Thursday.

Analysts are now expecting a higher chance of a rate hike from the RBA, which has one of the highest interest rates in the world, at 2.0%.

The Pound to Australian Dollar Outlook: Strength to be Temporary

The technical outlook for the pound to aussie, is currently very bearish.

The longer term charts, such as the monthly chart below, is showing a high chance the pair may be about to make a bearish move lower.

The pair has completed a three wave A-B-C pattern and then rolled over at the highs.

The pair then fell for three months in a row before finding support from a multi-year trend-line where it is currently trading.

This is a very bearish sign, coming after the completion of an A-B-C pattern, and indicates a high chance of a move lower.  

Momentum has also been strong during the last four months, further indicating the probability of more down-side; in addition the MACD momentum indicator has crossed over its signal providing a sell-signal.

If the pair manages to break clearly below the trend-line and the S1 monthly pivot, confirmed by a break below 1.9700, it would provide a strong signal of a major bearish move down to a low target at 1.8760.

On the daily chart it is possible to see that the pair has already broken through the major multi-year trend-line before returning to it over the last two days.

From here it will probably air kiss the line goodbye, before turning lower again. 
Ideally we would want to see a break below the 1.9880 lows for confirmation of a continuation down to 1.9780, where the S1 monthly pivot is situated.

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