The GBP to AUD exchange rate has fallen notably since hitting highs above 2.04 on the 31st of May but price action over the past three days suggests a tentative floor has been formed.
From a floor the GBP/AUD would be afforded the chance to rebound.
The pair may have found a temporary bottom at the 1.9858 level, due to an important chart level called a monthly pivot (PP), which traders use to trade counter to the trend, attempting to catch a bounce.
The short-term up-trend which started at the 1.8287 April lows remains intact despite the steep sell-off, and there is a possibility the pair could rotate and move higher from its current level, resuming the up-trend.
For this to happen, however, I would need to see a break above 2.0600 for confirmation, with a target then at 2.0687 where the R1 monthly pivot resides.
Alternatively, a break clearly below the monthly pivot (PP), confirmed by a move below 1.9750, would probably see the way open to easy pickings down to the 1.9450.
The bearish scenario is also supported by the MACD indicator in the bottom pane which is showing a cross of the MACD below its signal line, which is often use as a confirmation prices are rolling over after peaking.
Westpac's FX Model Confirms Aussie Buy Signal
Supporting a continuation of the recovery in the Aussie is major Australian lender, Westpac’s FX model, which has increased its weighting of Aussie buy positions, according to Westpac FX Strategist Richard Franulovich.
The model changes the allocation of currencies within a portfolio according to whether it expects them to strengthen or not:
“The G10 FX model makes a strong push into AUD, lifting its long exposure to +14.1% from 4% last week, by far and away the most bullish the model has been on AUD since Oct 2015.”
The bullish signal comes from a positive outlook for growth and yield, longer-term the model is negative the Australian dollar.
Australian Economic Growth Justifies a Stronger Australian Dollar
Aussie growth has been the subject at the forefront of recent FX commentary surrounding the currency due to the surprise 1.1% GDP rise in Q1.
Analyst Jeremy Stretch, of CIBC Global Markets, reports that the better-than-expected growth rate has reduced the probabilities of the Reserve Bank of Australia increasing interest rates in August to 46%.
It has also given the RBA more time to consider whether or not to reduce rates.
A cut in interest rates almost always weakens a currency as it detracts from global capital flows which tend to favour destinations where they can get higher interest, and therefore greater returns.
Stretch sees a combination of factors reducing the probabilities of an RBA cut. These include the fact that the Australian dollar is substantially less valued, and also that lower interest rates could pose a, “risk (of) further extending elevated consumer leverage.”
ANZ bank note that despite solid growth, the Australian economy exhibits weak inflation.
In commenting on Q1 GDP growth, they say:
“The 1.1% q/q gain in Q1 GDP is a strong result and suggests that the economy is weathering the downturn in mining investment well.”
Increased growth reflects the economy’s success in transforming from a resource driven to a services orientated economy:
“Solid consumer spending and strong growth in both housing construction and services exports are helping to drive the transition to non-mining growth.”
Inflation pressures remain subdued and are likely to continue to stay low for some time. A lack of wage inflation is a major cause, and although ANZ see tentative signs wages could be bottoming out, they expect inflation to remain low for at least a year:
“While this is very tentative evidence that wage inflation may be bottoming, we continue to expect underlying inflation to remain below the Bank’s 2-3% target band until close to mid-2017.”
Due to their negative forecast for inflation ANZ’s base scenario is that the RBA will cut rates in August:
“We think that the weakness in inflation is likely to keep the Bank in easing mode, and we continue to expect another cut in the cash rate of 25bp to 1.5% at the August board meeting.”