GBP/AUD Itching to Break 2.13

GBP/AUD Itching to Break 2.13

GBP/AUD Itching to Break 2.13

GBP/AUD is itching to break 2.13 and we believe that this week’s event risks provide the perfect catalyst. Sterling traded lower today for no specific reason and given last week’s hawkish comments from BoE Governor Carney, Wednesday’s central bank minutes will most likely be less dovish. In fact today’s house price report from Rightmove reinforces our view that the Bank of England is growing more comfortable with their outlook for the economy and closer to raising rates. Hawkish comments would reinvigorate the rally in sterling. In contrast, today’s steep decline in gold prices reduces the attractiveness of holding AUD. The Reserve Bank of Australia releases the minutes from its July monetary policy meeting this evening. At the meeting, they said, monetary policy needs to be accommodative and further A$ depreciation seems likely and necessary. This comment was surprising because at the time, AUD/USD was trading around 0.7450, right around their 75 cent target. Given that the RBA met during the meltdown in Chinese equities, the tone of the monetary policy statement will most likely reflect their concern about the possibility of further weakness in stocks and its implications for China’s economy. So while AUD bounced intraday, dovish minutes will send the currency to fresh multiyear lows versus the British pound.

GBP/AUD is trading at its strongest level in 6 years. Technically it has broken through the 50% Fibonacci retracement of the 2008 to 2013 decline at 2.0760 and the psychologically significant 2.10 level. The next area of resistance once 2.13 breaks is the 200-day SMA at 2.20. Should the currency pair reverse and drop below the 50% Fib then the next stop will be 2.05. In the meantime, the uptrend remains intact.

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