Image Patrick Nouhailler, License: CC BY-SA 2.0. Source.
The Australian Dollar starts the new week on a soft footing owing to disappointing Chinese data.
The Aussie has had a good run of it lately against the pound, advancing for a straight five days into last Friday's close.
This advance pushed the Pound to Australian Dollar exchange rate (GBP/AUD) through an area of resistance at 2.0485-2.0419 and to the big 'line in the sand' that starts at 2.0342.
Above: Big support holds for now.
It is here that support stretches right back to March, and it is here that Sterling must mount a last-ditch attempt if it is to avoid completely relinquishing its long-term period of appreciation.
The exchange rate started the new week at 2.0388, a level that is below the nine-day exponential moving average (EMA) at 2.0489. The Week Ahead Forecast model judges an exchange rate to be in a near-term downtrend while below this level, which leaves us bearish ahead of the new week.
To be sure, GBP/AUD is rising off the big support zone we mentioned at the time of writing, helped by AUD's negative reaction to a disappointing data dump out of China.
The world's second-largest economy reported an above-consensus expectation unemployment rate of 5.3%. Industrial production disappointed at 5.2% y/y, massively undershooting the conesensus bet for 5.7%. Retail sales missed at 3.4% vs. 3.8% expected.
So we have consumer-facing and industrial sectors disappointing, which is leading Chinese proxies like the Aussie dollar to underperform.
Although GBP/AUD starts the week with a rise, we think the pressure can build again through the middle part of the week as investors face up to the reality of a Federal Reserve rate cut.
The cut should be the first in a series of cuts, which will lower the cost of capital in the world's largest economy and boost the global economic pulse.
This is highly beneficial to risk-sensitive and global-facing currencies like the Aussie. In fact, GBP/AUD's steady decline since mid-August can be linked to improving sentiment linked to growing odds of further Fed rate cuts.
The best hope for a GBP/AUD break higher would rest with a disappointing Federal Reserve decision whereby rates are cut but the Fed pushes back against generous market expectations for further such moves.
"With an estimated three 25bp cuts by year-end — starting at this week's Fed meeting — and c.150bp by the end of next year, however, even larger downside misses in employment statistics are required from here for policy to enter accommodative territory, which is a nontrivial bar to clear," say foreign exchange strategists at Barclays in a weekly note.
Much will also depend on the UK side of the GBP/AUD equation, with labour market, inflation and retail sales data all due this week.
The Bank of England's Thursday policy decision could also be consequential, particularly if the Bank reaffirms a committemnt to keeping interest rates unchanged owing to fears that inflation is rising too far from the 2.0% target.
The UK's base interest rates is superior to that of Australia's, and this can limit GBP/AUD downside, even if the pair looks to be under short-term pressure.