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Pound drops over 2% following Bank of England Statement

Published: Friday 03 February 2017

  • Pound drops over 2% following Bank of England Statement
  • Brexit headlines overshadowed by Trump
  • No change expected from Reserve Bank of Australia interest rate announcement 

Pound drops over 2% following Bank of England Statement

The pound lost over 2% as the Bank of England (BoE) played down expectations of an interest rate hike in 2017 and suggested that wage growth could be poor this year. It’s at odds with their upgrading of growth forecasts, but a weaker pound will boost exports, even if people worry about the rising cost of goods. The Brexit whitepaper has been released – nothing new in the detail, just echoing Theresa May’s Brexit speech; and following the MP’s vote, the triggering of Article 50 draws nearer. UK economic data has been painting a pretty rosy picture of late, with only a very recent drop in wage growth dulling the picture, but the market is still happy to sell the Pound aggressively on any bad news, as we’ve seen today.

Brexit headlines overshadowed by Trump

Brexit headlines take second place to Trump headlines, however, and we’re seeing reaction to the change from the long held US “strong dollar policy” to one where the currency is overvalued – the idea being that Trump wants to weaken the US Dollar to boost US exports, growth jobs in the States. Also, the US Federal Reserve dampened expectations of further interest rate increases in the US in the short term and consequently funds flowed out of GBP and the USD into currencies that offer more attractive interest rates – AUD and NZD being two of the beneficiaries.
It’s not all plain sailing for the Aussie Dollar, however, as the AUD and the wider economy is boosted when Chinese demand is high, and they’re importing Australian commodities for their large scale infrastructure spend – the potential trade war between the US and the likes of China could stifle demand; and consequently the Australian Dollar.

No change expected from Reserve Bank of Australia’s interest rate announcement

Key data releases for Australia this month will be Retail Sales on 6th February and the Reserve Bank of Australia’s (RBA) interest rate announcement on 7th February- no change is expected, but the accompanying statement will move the market. This will be followed by Australian Unemployment data on 16th February.

Guidance for buyers and sellers of Australian Dollars

Technically, after a strong performance for the Pound over the last fortnight, which saw it rally from 1.60 to 1.6700, it spent the last few days trading a two cent range, waiting for momentum to push it up to the next level of resistance at 1.68 onto 1.7200. Sadly, with the release of the latest Bank of England outlook, the pound is back under pressure. It’s currently having its largest one day drop since October, with the downside target 1.60 again.
Below 1.60 opens up a the next level of support at 1.5300 whilst a recovery back over 1.6400 would likely see a resumption of the 1.64-1.68 range.  
If you’re a seller of AUD, I would recommend orders to sell at a rate of 1.6200 initially; and if you’re a buyer of AUD, orders at 1.66-1.67, with a stop loss order (safety net) order below 1.60.

Australian Dollar Research Report compiled by Alastair Sweetman

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