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Australian Dollar Research Report

Published: Monday 04 April 2016

The uptrend in GBPAUD gave way in February and there was always the risk that if it did, it would be followed by a sizeable fall which is where it finds itself in through March. The Pound is struggling against all currencies other than the USD (which has weakened on dovish US monetary policy) and looking at the GBPAUD chart it is heading down towards 1.8400 which is a 50% retracement of the whole rally from the 2013 low (1.44) to the 2015 high (2.24). With the EU referendum vote still 3 months away (June 23rd) and the polls still indicating a chance of the UK leaving the EU, in this environment it’s not unreasonable to expect the Pound to remain under pressure.

Moreover the shift of US monetary policy is boosting demand on the Australian Dollar. In December the Fed forecast 4 interest rate increases in the States which dampened risk appetite, commodity prices and higher yielding currencies like the Aussie and Kiwi. March arrived and Fed Chairman Yellen suggested that interest rates may only increase twice this year – the shift in policy triggered with concerns over slowing global growth, falling US domestic output and low inflation. Risk appetite has increased and the Aussie is gaining whilst the Pound struggles as the EU Referendum vote looms on the horizon.
Last week Glenn Stevens said that the Australian economy was adjusting quite well to lower commodity prices and that the central bank had more scope to respond should circumstances warrant. The outlook for monetary policy in Australia is relatively neutral for the remainder of the year which is helping bolster demand for the Aussie after a series of interest rate cuts over the last 18 months. Keep an ear out for next Tuesday’s RBA interest rate meeting for updated growth and inflation outlook – they may confirm they’re in “wait and see” mode  if they hint at further interest rate cuts then the Aussie will lose ground.
So the short term target on GBPAUD is 1.84 – the fact is the 50% retracement may provide some support so stop loss orders below there may be wise. Whilst GBPAUD is oversold on the daily chart, it’s not on the longer term weekly and monthly charts – consequently I would suggest there’s more downside to come. With the outcome of the EU Referendum so uncertain, I think it’s fair to say the Pound will be subject to further weakness against all currencies until the vote (and thereafter if we vote to leave the EU). We would advise you to consider trading a portion of your funds here if I was a buyer of Aussie. We would advise seller to trade a portion of your funds with more held aside should in case it breaks below 1.84 and for a downside target, 1.7250-1.7500 is best advised.

Technical analysis by Alastair Sweetman

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