- Charts of GBP/AUD show bullish technical patterns
- Bull flag and channel breakout are two key positive signs
- Ky data release for pair is Retail Sales in October
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The Pound to Australian Dollar rate is trading at around 1.8590 at the time of writing after rising 1.60% in the week before and studies of the charts indicate the pair is likely to rise in the week ahead.
The 4-hour chart - used to assess the short-term trend, defined as the next week or five days - shows that after a sharp run-up, the pair formed a bull flag continuation pattern which suggests a high probability that the exchange rate will rise.
Bull flags consist of a steep rally (the flag pole) followed by a square-shaped consolidation pattern (the flag). They warn of higher prices to come after confirmation following a breakout of the square consolidation.
The expectation is for an extension higher of the same length or a fibonacci ratio of the pole.
Above: GBP/AUD four hour chart with annotations, copyright Pound Sterling Live.
- Reference rates at publication:
GBP to AUD spot: 1.8508
- High street bank rates (indicative): 1.7860 - 1.7990
- Payment specialist rates (indicative: 1.8340 - 1.8515
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- Or, set up an exchange rate alert, here
The usual conservative estimate is a 61.8% fibonacci extension of the pole, which in this case gives a target of 1.8750.
The daily chart shows the pair having just broken out of the upside of a descending channel.
This is a further bullish sign and suggests an extension higher that is a similar length to - or a Fibonacci ratio - of the height of the channel.
In this case it gives the same target of 1.8750 as the 4-hour chart.
Above: GBP/AUD daily chart with annotations, copyright Pound Sterling Live.
A further bullish sign comes from the three-day continuation pattern which formed on Wednesday, Thursday and Friday of last week and is shown enclosed by the black square on the chart. This is a high probability continuation pattern too.
The weekly chart - used to give an idea of the longer-term outlook, which includes the next few months - is indicating a bullish outlook for the pair, too.
Above: GBP/AUD weekly chart with annotations, copyright Pound Sterling Live.
The price found support at two major MAs - the 50-week and 200-week - two weeks ago and reversed direction.
Last week saw the formation of a long green bullish candlestick which reinforces the probability of a bullish reversal occurring. If it is followed by another bullish green candlestick this week it will form a Japanese bullish reversal candlestick chart formation called a ‘three white soldiers’ pattern.
In such a case the pair would be expected to continue higher, potentially beginning a new medium-to-long term bullish trend.
The Australian Dollar: What to Watch this Week
The key release for the Australian dollar in the week ahead is Retail Sales for the month of October out at 00.30 GMT on Friday November 26.
The previous result showed a 1.3% rise MoM in September - experts are saying the gauge will likely show a 2.5% rise in October.
If the actual figure beats expectations it will probably support the aussie since higher retail sales suggests a ‘hotter’ economy and rising inflationary pressures.
This in turn will increase pressure on the RBA to alter its dovish stance and raise interest rates at an earlier date. Currently they do not expect to raise them till 2024.
Higher interest rates strengthen a currency because of the phenomenon of the carry trade where traders borrow money in a currency with low borrowing costs to purchase a currency with higher interest rates - pocketing the differential between the two rates as profit.
The other key event for the Australian dollar is a speech by the Reserve Bank of Australia (RBA) governor Michele Bullock at 00.40 GMT on Wednesday November 24.
Bullock’s role is to oversee financial stability at the bank and as such she may not directly refer to forward guidance on interest rates, however, there is still a possibility she may drop clues on monetary policy and her statements will surely be parsed by analysts following the markets.
Last week, RBA Governor Philip Lowe, gave an address concerning inflation in which he more or less reinforced the bank’s stance for not raising interest rates anytime soon.
Lowe said, “Economy and inflation would have to turn out very differently for the board to consider a hike next year," in his speech to the Australian Business Economists Webinar last Tuesday.
Lowe still did not see the RBA raising interest rates until 2024, saying it is "still plausible the first increase in the cash rate will not be before 2024." This is considered late compared to other major central banks.
The only conditions warranting an earlier rate hike would be “if inflation rises faster than expected.” Said the RBA chief.
Even if underlying inflation was at the 2.5% mid-point of the RBA target range it would still not warrant a rate rise, added Lowe.
The Aussie, nevertheless, rose marginally versus the dollar following his comments although it ended the day lower versus the pound, falling 0.75% on the day.