GBPAUD has come under increasing pressure in recent months, due to shifting interest rate expectations in both the UK and Australia.
The Reserve Bank of Australia left rates on hold at their last meeting, when many (especially the Aussie media) were calling for a rate cut. Glenn Stevens, the RBA Governor said a wait and see approach was appropriate for the time being.
With the market scaling back their rate cut expectations and commodity prices bouncing from their lows, the Aussie has been gaining in strength.
In contrast, the UK data has been a bit mixed of late with unemployment hitting the lowest levels since 2008 but inflation also falling. CPI (Consumer Price Index) is currently 0.0% and Wage Growth has also stalled. The Bank of England downgraded their growth and inflation forecasts for the next 2 years in the November inflation report, suggesting UK interest rates are unlikely to be raised until 2017 as opposed to the middle of 2016. As such, we have seen Sterling weaken.
From a technical perspective, GBPAUD remains within a corrective downtrend and is currently testing the long term uptrend that has been in place since April 2013 (green line on the chart). We have however broken out of the up-channel that had been in place since the Scottish Referendum result (Sept 2014) which does suggest the trend is changing.
If we see a confirmed break of the long term trend (usually we would look for several closes below the level – currently 2.07 or so), then we would expect to see the market pick up some support at 2.065 and then 2.025. For the time being the trend line is holding, but we would recommend keeping a close eye on this.
In terms of upside potential, the previous up channel will provide initial resistance (2.101) and then the current down trend is likely to cap things for the time being (2.132 as we speak but this is a downward slopping line so the level will drop as time goes on).
It is worth mentioning that over the festive period, there is the potential for increased market volatility due to the thin market volumes (with so many traders away from their desks). In these conditions the trades that do take place have a bigger impact on prices than they would do usually.
For time being, we need to work within the downtrend that is place. With this in mind, targeting rates in the 2.10-2.12 region seems like the best strategy for the time being. A confirmed break below the long term trend line at 2.07 would be a concern though, so a stop loss below the recent lows of 2.035 would be a good safety net.
Finally some reprieve from the uptrend, initially trading some around current levels is a good option as this trend line has underpinned the market since April 2013. I would not necessarily suggest trading the full amount current levels, just in case we do see a break of this trend line. A move back into the previous up channel would be a concern and a break above the current downtrend (2.135 or so) would suggest the correction has run its course and we’re heading higher once more and should be traded upon.