GBP/AUD Recovery Forecast to Attempt 2.14
- Written by: Gary Howes
The British pound is forecast to extend its recent rebound against the Australian dollar to at least 2.14.
Both the technical and fundamental picture now advocates for further Aussie dollar weakness.
GBP to AUD Technicals: We are watching the pound to Australian dollar exchange rate (GBPAUD) bounce off what appears to have established itself as a solid level of support for the pair.
The level can be found in the downside approach towards 2.08. Essentially, currency traders who are trading the pound lower against the Aussie set their exit orders in the approach to the psychologically significant 2.08 area in anticipation of the move failing at these levels.
Guiding such decisions will be the observation by currency market players that this region has provided support on two occasions in 2015 already - once in July and then again in September.
There is therefore historical precedence regarding GBPAUD bouncing at this point.
As trades are exited it is necessary to sell Australian dollars and buy the British pound - the effect is a recovery.
As you can see we are suggesting that the outlook for the GBP/AUD at the present time does rest heavily with technical considerations.
As such, we look for GBP/AUD downside to be limited until such a time 2.08 is broken decisively.
We reckon the recovery could extend towards 2.14 - another number that has dictated trade in sterling / aussie.
The zone provided resistance to advances by the British pound in late July. It then turned to support on two occasions - in late August and early September.
An educated guess would suggest the rally could continue until this area of congestion at 2.14 is reached.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0154▼ -0.04%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9468 - 1.9549 |
**Independent Specialist | 1.9872 - 1.9952 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Fundamentals: AUD Downside as Metals Rally Fades
The late September / October recovery in the broader Australian dollar complex can largely be attributed to the relief rally in commodity prices.
For the Australian dollar the price of metals is particularly important as such exports to China account for a significant portion of Australian economic output.
The question for the Aussie is therefore one concerning the outlook fpr Chinese economic performance and base metal prices.
A monthly economic forecast note from Standard Chartered, the UK bank that specialises in Asian markets, has confirmed their base-case scenario to be one of ongoing weakness in metal prices:
"We believe the recent relief-rally in base metals has likely ended and see further downside over the medium term. In our view, the structural slowdown in China amid a largely oversupplied market remains the main driver of our negative view.
"We see the excess supply situation becoming increasingly worse in several cases, including in aluminium, nickel and zinc."
On the demand side, Standard Chartered see no evidence of a pickup in China. In their view, the recent pickup in China property transactions does not signal a broader revival in construction activity. We also continue to see any fiscal stimulus to be limited in scope and magnitude.
"More fundamentally, China’s focus away from an investment- and export-dependent economy suggests demand will incrementally get softer over time," say Standard Chartered.
Until we start getting stronger data signals out of China and are confident in calling a floor on metal price declines we would expect any strength in the Australian dollar to ultimately be capped.
RBA Keep Steady Hand
We are seeing some Aussie dollar strength on the 20th of October after the release of the RBA's minutes from their October meeting.
The minutes from the RBA’s October meeting released this morning suggested little change for the near term path for monetary policy.
"While there are clearly concerns over growth prospects in China and East Asia, on the domestic front the tone was quintessentially ‘glass half full’" says ANZ's Felicity Emmett.
That said, ANZ warn they continue to expect the RBA to wait until next year to cut rates, when the stimulus from housing and the lower AUD are likely to fade.
Should the rest of the market agree then we will certainly witness a resumption of a more sustained AUD downmove.
