Trade War Surge Arrests Pound's Decline Against Australian Dollar

The pound to Australian dollar Week Ahead Forecast is constructive.

The Australian Dollar was hammered by Friday's headlines surrounding U.S. and Chinese trade, falling 1.66% against the pound. 1.75% against the euro and 1.24% against the U.S. Dollar.

Clearly, the U.S. threat of a 100% import tariff on Chinese goods left its mark on the Aussie, reminding traders that it is particularly sensitive to the global trade realignment underway.

Although the U.S. and China indicated they were keen to negotiate ahead of a newly imposed November 01 deadline, nervousness will linger, and this can keep AUD offered.

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i - Based on average GBP/AUD rate observed in July.

The result of that 1.66% advance in the pound to Australian dollar exchange rate (GBP/AUD) is a more constructive technical setup going into this week.

The trade headlines came as GBP/AUD was breaking down and falling through a key support zone at 2.0291, indicating that the setup was on the cusp of a more notable deterioration that could have brought 2.02 into contention this week, ahead of a decline to January lows at 1.96 ahead of year-end.

The subsequent rally lifts GBP/AUD off the floor and back above the 21-day exponential moving average at 2.0444, which must be defended if the GBP/AUD is to turn the trend from downward to upward.

Do we think GBP/AUD will flip from a short-term downtrend to an uptrend? Not necessarily, but the shock of the trade war headlines arrests the decline for now and opens the door to a consolidation around 2.0400 over the course of the coming week.

The fundamental setup continues to favour the Aussie Dollar: it's clear that the Australian economy is in a better place than that of the UK, and this should be reflected in a softer GBP/AUD profile into year-end.

With this in mind, the calendar highlight of the week is Australia's employment report, due Thursday, where the consensus looks for 20k jobs to have been created.

Recall, last month's release was a bit of a shocker as it showed an unexpected contraction of 5.4K.

The Aussie dollar fell in response to the previous iteration, and we would therefore look for a similar response to this week's print. However, most economists agree that last month's print was something of a blip, meaning we could get some decent payback to the topside this week.

If so, look for an AUD rally into the weekend.

The data will provide an important insight into the state of the economy ahead of next month's Reserve Bank of Australia interest rates decision. Currently, the market sees less than 50% odds of another cut, owing to Australia's firm inflation levels and robust economy.

Should the data disappoint for a second month in a row, policy setters will surely consider an 'insurance' cut as a means of protecting against any further downturn in the jobs market, which would in turn weigh on the Aussie dollar.

That being said, the Aussie is one of the better performing major currencies of the quarter, courtesy of Australia's firm economy, low debt levels and the limited room available to the RBA to cut interest rates.

An above-consensus jobs print will buffer these settings, putting the AUD on a firm footing through the latter part of the week.

Turning to the GBP side of the equation, Tuesday's labour market report is set to provide further evidence of cooling wage pressures and increasing unemployment, all courtesy of a slowing economy and the lingering effect of the government's National Insurance increase.

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This will inevitably raise bets for further interest rate cuts at the Bank of England, which will weigh on the pound.

For GBP/AUD, the dichotomy in labour market fortunes will become all the more apparent if Australia's labour market report, due a day later, beats expectations.

"We also look for the ILO unemployment rate to stabilise at 4.7% in August, though risks are a little to the downside. We expect private sector regular pay to drop to 4.5%," says a weekly economics note from JP Morgan. "The still weakening labour market should gradually make the case for cuts to resume next year."

Of course, this rise in bets for a November rate cut will fly in the face of the reality that UK inflation is nearly double the Bank's 2.0% target, which will increase scrutiny on the Bank's credibility and the prospect of a UK currency debasement.

Thursday brings a monthly GDP update, where a 0.2% monthly growth figure is anticipated for August. Anything above this could offer the pound a boost; anything below will weigh.

Note too that parliament returns from the party conference recess, which means an inevitable increase in speculation about the contents of next month's budget.

Nothing good can come out of this: expect a series of speculation about which taxes will be invented and which taxes will be raised.

Inevitably, this tinkering won't raise the required sums, meaning we will be back here next year.

The UK's public finances are deteriorating, and this will ensure bond yields stay elevated and the pound remains at risk of a confidence crisis.