Bearish Signs But No Follow-Through Yet – Digitalmunition




News The Australian Dollar Suffers Sixth Day of Losses but More Risk Looms

Published on September 14th, 2019 📆 | 8575 Views ⚑

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Bearish Signs But No Follow-Through Yet

© Greg Brave, Adobe Stock

– GBP/AUD has bearish patterns forming

– Lack of actual downside means outlook mixed 

– Pound to be driven by Brexit; Aussie by RBA minutes

The Pound-to-Australian-Dollar rate is to begin trading around 1.8746 Sunday after rising by 1.7% in the previous week, although there are increasingly bearish signals coming from the charts that suggest, sooner or later, the market will see a correction lower.

Gains last week were down to further evidence that a ‘no-deal’ Brexit is unlikely after UK lawmakers rejected Theresa May’s deal and then also the option of an exit from the EU without any formal agreement.

A majority of MPs did, however, vote to request from the EU an extension of Article 50 and in the week ahead, the government is expected to try to get its deal approved again. In the event that it fails, attention will turn to how long the delay to Article 50 will be.

Above: Pound-to-Australian-Dollar rate shown at weekly intervals. 

The technical outlook remains mixed. The pair is in an established short-term uptrend but is, nevertheless, vulnerable to weakness because of a ‘broadening formation’ or ‘loudspeaker’ pattern which has developed, which is generally a bearish indicator.

‘Loudspeaker’ patterns usually have 5 component waves, labeled A-E but this one only has completed only 4 so far suggesting a wave E down could be next to unfold.=

Above: Pound-to-Australian-Dollar rate shown at 4-hour intervals.

The four-hour chart above shows another possible smaller broadening formation unfolding. The smaller one also looks as if it has unfolded 4 out of its 5 waves. This indicates wave ‘e’ could be next to unfold, bringing the exchange rate down to 1.84 and the base of the rising channel.

Given how bearish broadening formations are there could be even deeper losses if the pair breaks out of the pattern below 1.84 – possibly even taking the exchange rate down to 1.8000.

Yet despite the bearish patterning, the pair remains in an intact short-term uptrending channel, thus we cannot be outright bearish right now, and would require confirmation from a decline in price action itself to confirm a successful breakout lower and reversal of the trend.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

The Australian Dollar: What to Watch

The two key releases for the Australian Dollar are the minutes of the last Reserve Bank of Australia (RBA) meeting and employment data.

Analysts are currently split over whether the RBA will cut interest rates or not so the RBA minutes will be a closely watched deciding factor in the debate with implications for the Aussie. If the members of the RBA policy committee appear to endorse a possible rate cut it would weigh on the Australian Dollar. Lower interest rates weigh on currencies as they make the country less attractive as a destination for foreign capital inflows. The minutes are released at 00.30 GMT on Tuesday.

“Markets are now giving about a 50% chance of an RBA cut by June, up from a 40% chance immediately following the December quarter GDP release. We continue to favour moves coming later in the year – August and November the likeliest timing – with the Bank still seeming reluctant to cut and likely to require more evidence around the ‘consumer-housing nexus’ and the labour market outlook before taking action,” says Marios Hadjikyriacos, an economist at FX broker XM.com.

The other main release is employment data. This has traditionally been quite strong in Australia and one of the bright spots of the economy. The risk lies with it weakening and surprising the market negatively. This would weigh on the Aussie.

The unemployment rate is forecast to remain unchanged at 5.0% in February when the data is released on Thursday at 00.30. Payrolls overall are expected to rise 14.5k. One key factor with Aussie employment data is the split between full and part-time jobs. Full-time jobs are more important than party-time as a sign of growth because part-time jobs suggest businesses cannot afford to take on full-time staff.

Housing market data will also be closely followed when it is released at  00.30 on Tuesday (at the same time as the minutes). Housing has been a weak spot for the economy recently. Falling house prices have reduced overall wealth, and this combined with a relatively high level of household indebtedness has contributed to the worsening outlook for the economy.

The Aussie house price index is forecast to show a -2.0% fall quarter-on-quarter when it is released on Tuesday. This would be deeper than the -1.5% decline in Q3.

The Pound: What to Watch

The main fundamental driver for the Pound in the week ahead is probably developments in the Brexit process, with the Bank of England (BOE) meeting on Thursday also likely to cause volatility.

It is highly likely that the government will try, for the third time, to get its Brexit deal approved by Parliament, or failing that, that the EU will require a lengthy delay of article 50.

The latest reports from Brussels are suggesting the EU may try to make a delay conditional on either the UK having a second referendum, a general election or a very firm plan.

It is suggested this may focus minds, especially amongst Brexiteers who could fear a hijacking of Brexit if there is a delay. This will put pressure on them to accept the government’s negotiated deal.

The two most likely scenarios, therefore, are that Theresa May’s deal finally gets approved on a third attempt, or that Brexit is delayed on the condition of a referendum or general election being held.

Both would be very positive for the Pound, which compliments the overall bullish technical outlook.

The BOE meeting on Thursday, at 12.00 GMT, could also impact on Sterling. There is a risk the BOE may change its statement to reflect the recent slowdown in the economy. If so the Pound is likely to suffer.

Up until now, it had been assumed Brexit risks were the only thing stopping the BOE from raising interest rates, but the slowing economy may be providing them with other reasons not to.

“The economy has no doubt slowed but the Bank seems unwilling to shift to a more dovish stance, reasoning that it should just be patient for now as an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself and hence, kickstart investment and growth. Overall, the BoE is unlikely to deviate much from this stance, but if there is any change, it’ll probably be towards a more cautious bias,” says Raffi Boyadjian, an economist at XM.com.

From a purely hard data perspective, the main releases are employment data out on Tuesday, inflation data out on Wednesday and retail sales on Thursday.

Labour market data is expected to continue showing signs of strength, when released on Tuesday at 9.30. The unemployment claimant count is expected to have risen by only 2.7k in February – a relatively low count – the unemployment rate is forecast to be stuck at a historic low of 4.0% in January, and overall payroll count to have risen by 120k in December, according to consensus estimates.

More important for Sterling, perhaps, is average earnings in January, since this has more influence over Bank of England (BOE) policy.

If average earnings rise more than the 3.4% in January (3.2% including bonuses) that is forecast, inflation will probably rise and so will interest rates – with expectations increasing that the BOE will raise them, and this will drive Sterling higher. Higher interest rates are positive for the Pound because they attract and keep greater inflows of foreign capital.

Inflation is out on Wednesday and is another key metric for the Pound. As explained above inflation influences BOE policy which impacts on the currency. In January inflation came out surprisingly lower after falling -0.8% compared to December. If inflation is also shown to be negative in February it could really drive down the Pound. Current expectations, however, are for a 0.2% rise.

Thursday sees another major data release, in the form of retail sales in February, out at 9.30. This is forecast to show a -0.3% fall from 1.0% previously. A deeper-than-expected decline, however, could trigger more weakness for Sterling.

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