GBP/AUD Headed Back to 2.13

GBP/AUD Headed Back to 2.13

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GBP/AUD Headed Back to 2.13

Sterling performed well today despite the lack of U.K. or U.S. data. The gains for the currency pair were swift once the 1.5570 level was broken. Last week the changes to the Bank of England’s economic forecasts suggests that the central bank is in no rush to raise interest rates. For the past few months we have been saying that the BoE will raise rates in 2016 and our outlook has not changed. The most important thing to remember is that while the BoE is in no rush to tighten, they will still be the next major central bank to raise rates and therefore sterling should be bought on dips and not sold on rallies. At the same time, the back to back weakness in Chinese data should limit the gains in the Australian dollar. Ultimately we believe that on a fundamental basis GBP/AUD will rise back to 2.13

Technically, the recent slide in the currency pair has taken GBP/AUD to attractive levels. Not only is the currency pair rising back above the first standard deviation Bollinger Band (a sign of a turn) but it also bounced off 2.08, a level that held as support in July. If the turn gains momentum, it could take GBP/AUD to 2.13

GBP/AUD Itching to Break 2.13

GBP/AUD Itching to Break 2.13

Chart Of The Day

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.