GBP/AUD: Potential Upside as Iron Ore Price Rises Start to Stall
Pound Sterling could extend recent advances against the Australian dollar on signs iron ore prices may be about to peak.
- Pound to Australian Dollar exchange rate at time of writing: 1.7302
- Our studies suggest GBP/AUD rally could extend to 1.76
- Australian to US Dollar exchange rate: 0.7555
The Australian Dollar and New Zealand dollars ended the day broadly higher suggesting a recent bout of weakness may be coming to an end.
"These two currencies have been very strong despite mixed economic data. The only explanation is their generous yield and the lack of excessively dovish comments from the RBA and RBNZ. AUD shrugged off disappointing housing numbers," notes Kathy Lien at BK Asset Management.
Although Retail Sales in the month of July is the biggest data release for the Aussie dollar in the week ahead, it is less likely to move the currency as much as the travails of iron ore, the country’s largest commodity export.
According to analysis from CMC Market’s chief market analyst Michael McCarthy the commodity is showing signs of weakening both from a fundamental and a technical perspective, which would put heavy downwards pressure on the Aussie.
“International steel markets are plagued by ongoing tariff disputes, and the US recently raised anti-dumping tariffs against Taiwan,” says McCarthy.
Adding:
“And a China Iron and Steel Association vice-president said yesterday that steel production will decline over the next three months, and with it iron ore demand, according to Bloomberg.”
Finally, from a technical perspective, McCarthy comments that the charts don’t look great either:
“The charts are pointing in the same direction – down, Below is the daily iron ore chart for Dalian futures. The price is in Renminbi. Note the double top formation, and the evening star that may herald a trend change to downward.”
The pound meanwhile has strengthened as recent data has shown the economy in finer fettle than had been expected in the post-Brexit environment.
The most recent releases showed strong retail sales growth and robust business investment in Q2 despite the impact of referendum uncertainty.
In the week ahead the main releases for the pound will be Manufacturing, and Construction PMI’s.
In July it was one of the metrics which did show a dramatic slowdown as a result of Brexit, so investors will be eagerly anticipating the August data to see if the worsening trend continues.
Looking now at the charts, and we see that they broadly support Aussie weakness as described by the outlook for iron ore, and continued sterling strength.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0112▼ -0.24%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9428 - 1.9509 |
**Independent Specialist | 1.9831 - 1.9911 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Where Next for GBP/AUD?
Technically speaking GBP/AUD has been in an established a short-term up-trend, but that recently it completed a pull-back.
Since the pull-back the pair has posted several strong bullish candles over the last twenty-four hours including a hammer and then a strong bullish follow-through the day after; and these recommend, due to their strength, a continuation higher.
Therefore a break above the 1.7400 level would probably lead to a continuation up to the monthly pivot (pp) situated at 1.7460.
A break above 1.7500, would then probably extend up to 1.7600.
