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The Australian Dollar and Pound are locked in a frustrating battle of attrition.
The Pound to Australian Dollar exchange rate (GBP/AUD) will likely pull back in the coming week, with any attempt to rally likely to be stymied by a wall of resistance.
The chart below says it all, gains are sold into in the vicinity of 2.1035, which is a graphical horizontal resistance zone, hemmed in by the upper ranges of the Bollinger bands.
Above: GBP/AUD at daily intervals.
Given this pair is looking to be in a mean-reverting mode, a decline to 2.0869 is thus fancied by our Week Ahead Forecast model.
We think the reason for this battle of attrition rests with the response of AUD and GBP to global developments regarding trade. The news on this front has been good lately, with the U.S. readying a number of major agreements with its biggest partners, including China.
This is good for markets, to which the GBP and AUD are positively aligned. However, it is the AUD which has a higher beta to equity performance, meaning it will likely pip GBP to the winners post when the mood is good.
This advocates for the pullback the charts are hinting at.
Equities rallied on Friday with the S&P 500 closing 0.5% higher to reach a fresh record high. "Reports Japanese and Indian officials have extended their trade negotiations stays in the U.S. is also supporting sentiment, with the Aussie higher in early trade," says Pat Bustamante, Senior Economist at Westpac Group.
Above: S&P 500 at new record.
Last week, U.S. President Donald Trump indicated the trade accord reached with China last month in Geneva was close to being fully implemented, which is good news for China and its proxies, of which Australia is considered.
"The improvement in Sino-US trade relations in the past quarter has been beneficial for the AUD given the economy's dependence on exporting to China," explains Skylar Montgomery Koning, an analyst at Barclays.
She also explains that U.S. tariffs remain approximately six times higher than they were prior to the Trump administration, continuing to weigh on global growth and, by extension, cyclical commodity currencies, of which AUD is considered.
So, while there is good news on one hand, the other hand offers some bad news.
All this keeps AUD contained, preventing it from running away higher. It also means a longer-term uptrend in GBP/AUD ultimately remains intact, even if it is on an extended pause.
This uptrend could be rebooted in the coming months if the Reserve Bank of Australia (RBA) opts to cut interest rates by more than markets are currently expecting, something Koning reckons is possible.
Above: Investors have steadily lowered expectations for the RBA interest rate, which has weighed somewhat on AUD.
"Domestically, conditions have also developed unfavorably, with unambiguously soft first-quarter GDP and subdued early indicators for Q2 data. For the RBA, this sets up a clear path for cuts into the end of the year. AUD faces downside risks with limited support from domestic fundamentals and heightened sensitivity to global risk sentiment," she says.
There are no data due out of Australia this week that can influence AUD, meaning external developments are of primary concern.
Keep an eye on this week's U.S. jobs report in particular, as it could raise the odds of a July interest rate cut at the U.S. Federal Reserve, an outcome that would be good for stocks and the Aussie Dollar.
Here, the headline is expected to be 100K additional jobs created in June, with the unemployment rate edging higher to 4.3% from 4.2%.