Pound Off 2016 Best Against Australian Dollar, Extremely Overbought Conditions Advocate for Consolidation
The surge in the GBP/AUD exchange rate has seen it recover all the losses it has sustained since the start of 2016; but heading into the latter part of May we would expect the advance to fade.
In early May we warned that the pound was about to embark on a notable climb against the Australian dollar, and we said that 2.0 was possible over coming weeks.
This call has come to fruition and GBP/AUD has in fact recaptured all the losses sustained since the decline from 2016’s opening level of 2.0227; and the next question becomes how much further can the advance extend.
For the first time in months those with Aussie dollar payments can sell sterling in the 2.01-2.0 area.
The rally in sterling-Aussie has been impressive with the rate bouncing off lows at 1.84 to hit the 2.0347 we are seeing today.
The currency pair has broken through a number of major resistance points on the way ensuring opposition to the move in the options market is cleared out of the way; but we do note that the pair is extremely overbought.
The best way of telling whether a currency pair has over-reached is to consult the Relative Strength Index (RSI). The RSI is considered to be in overbought territory when it crosses the 70 threshold. Recently the RSI on GBP/AUD’s daily chart read at 83.4.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0136▼ -0.13%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9451 - 1.9532 |
**Independent Specialist | 1.9854 - 1.9934 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The last time we saw such overbought conditions was in June 2013 when GBP/AUD was recovering from multi-year lows at 1.44.
In theory, a period of decline or consolidation should now take place as overbought readings of such a magnitude never tend to last long.
Back in 2013 the pair consolidated before tacking a more sustainable move higher; could this be the case again in 2016?
It is difficult, nigh impossible, to set any targets in such a market as the fundamental question of the EU’s referendum in June is hard to price.
Be under no illusion, if polling data shows a shift back in favour of the Leave camp then these gains could rapidly unwind, and forecasting the Great British public is not my job.
Australian Economy Undermines the AUD
What is easier to gauge and anticipate is the trajectory of Australian economic performance which is likely to see the currency find few friends over the near-term.
A litany of AUD negative events have been behind the Australian dollar’s fall from grace this May:
- April’s inflation data release showed an alarming slump in inflation
- The Reserve Bank of Australia’s response to the inflation data (and the strong AUD) was decisive, they cut rates from 2% to 1.75%
- Wage data for April declined confirming outlook for inflation is negative
- The April Labour Force report showed labour market momentum has slowed with majority of gains to the employment market coming from part time positions.
On the back of the data most economists are forecasting another interest rate cut at the Reserve Bank of Australia; and we believe that markets will be wary that a further rate cut could be on the cards.
These cuts to the interest rate drastically reduce Australia’s attractiveness as an investment destination for foreign capital as the yield that can be delivered in Australia is drastically reduced.
This should help keep a lid on the Aussie going forward and allow the British pound to remain in the driving seat.
