GBP/AUD to 1.61?

Sterling was the only currency that performed worse than the U.S. dollar this past week and we think further losses are possible. Data has been terrible with manufacturing, service and construction activity slowing and consumer credit dropping. These are the early affects of Britain’s decision to leave the European Union with more weakness likely to follow. However the main driver of sterling’s weakness this past week had less to do with data and more to do with the Bank of England’s cautious outlook. Despite upgrades to their economic forecasts, the BoE seemed in no rush to raise interest rates as they now expect inflation in 2 year’s time (a key measure) to be slightly lower than previously estimated. The problem for the BoE is the lack of clarity on how Brexit and Trump will impact the local and global economy. More specifically, Carney said “the Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way.” Investors were disappointed by his cautious tone and sent sterling tumbling as a result. The U.K. trade balance report is the only piece of market moving data on the U.K. calendar this coming week. Although the weak GBP should support demand, we expect further underperformance in sterling. Meanwhile the Australian dollar could outperform ahead of the RBA meeting. The RBA is widely expected to leave interest rates unchanged and maintain a neutral monetary policy stance as there has been both improvements and deterioration in Australia’s economy since their December meeting. Consumer spending for example has been soft, labor activity lacking and inflation slightly weaker. However business activity and confidence is on the rise as the Chinese economy continues to recover.

Technically, GBP/USD is under a lot of pressure and having broken below the 20-day SMA appears likely to make a run to 1.61 and possibly even 1.60. If it rises back above 1.6450 however we could se a stronger recovery to 1.66