GBP/AUD: Key Resistance Breaks on CPI Data
- Written by: Gary Howes
The pound sterling is once again trying to overcome a technical hurdle to its recovery against the Australian dollar.
The pound came against a wall when it met the 2.14 level agianst the Australian dollar on the 22nd and 23rd of October.
The decline from these levels marked this zone out as being a key hurdle that must be broken. Indeed, the 2.14 line previously put an end to the sterling's rally back in August confirming that it is an historically significant area for the exchange rate.
The failure to advance higher coincided with a Chinese interest rate cut which gave the AUD a fresh boost of strenght right across the board.
However, on the 28th of October we are seeing the GBP to AUD conversion back above 2.14 - can the pound hold its ground and confirm the recovery?
Those watching the market for further gains in the conversion should be aware that until we get a break of this point sterling upside could remain limited.
Aus Dollar Falls on Weak Inflation Data
Australian CPI came in much weaker than expected, seeing the money market price in a much greater chance of a RBA interest rate cut in Q4.
Q3 CPI came in below forecasts at +0.5 pct q/q and 1.7 pct y/y. This is less than what the Reserve Bank of Australia (RBA) had been projecting and almost at the floor of its long-run target band of 2 percent to 3 percent.
With mortgage rates rising at major Australian lenders the doors have certainly been opened to another rate cut.
AUDUSD has dropped sharply out of its recent range, after recent recovery attempts held under key trend resistance at .7400 earlier this month.
Support now lies at .7085/80 and then .7000, with resistance now at .7200/.7225.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 1.9526▲ + 0.08%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.8862 - 1.894 |
**Independent Specialist | 1.9252 - 1.933 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Chinese Boost
Last week we saw strength in the trans-tasman currencies follows another People's Bank of China (PBOC) interest rate cut.
China’s central bank cut rates for the sixth time in a year, lowering the one-year lending and deposit rates by 25bps to 4.35 and 1.5 percent, respectively.
The reserve requirement ratio for all banks was also lowered by 50bps, with an additional 50bps reduction for select lenders.
The Australian and New Zealand Dollars tend to benefit from stimulatory moves in Chinese monetary policy as any stimulus here tends to benefit their exports.
"Traders likely interpreted Chinese stimulus expansion as supportive for Australia and New Zealand’s own growth prospects, which could limit the scope for RBA and RBNZ easing, since the East Asian giant is a leading export market for both countries," says Ilya Spivak, Currency Strategist, at DailyFX.
Looking ahead, Spivak warns that "the chipper mood may struggle for follow-through as traders opt to withhold directional conviction ahead of Wednesday’s much-anticipated FOMC monetary policy announcement."
While Janet Yellen and company are unlikely to begin stimulus withdrawal this time around, the tone of the statement accompanying the rate decision is widely expected to set the tone for December’s sit-down.
The key risk to the AUD and NZD lies with the prospect of US dollar strength in the wake of the policy announcement.
If tightening in 2015 is truly on the agenda as many FOMC members have suggested, hawkish commentary setting the rhetorical foundation for liftoff may sink risk-sensitive assets like the New Zealand and Australian dollars.
Be aware that a pro-USD bias will inevitably also prompt a pro-GBP bias as the Bank of England will likely follow US Fed policy closely.
Signs that the Fed are about to rise will prompt traders to bet that the Bank of England will follow suit.
This could be the catalyst to a GBP-AUD rate above 2.14.
