GBP/AUD has slipped below 1.70 over the course of the first week of 2017 havinig opened the year's account at 1.7137.
The slide comes following a solid multi-week run that saw the exchange rate recover from its October lows towards 1.58.
Unfortunately for those hoping for better exchange rates, it appears that 1.71-1.72 is proving to be a solid interim ceiling.
However, we are quitely optimistic that a rally above here can transpire.
Our studies of the pair have identified a number of technical patterns that advocate for recovery - and these patterns are seen on various chart timeframes.
The pair is showing a completed bearish measured move on the monthly chart, indicating the possibility of the birth of a new short-term uptrend is underway.
A measured move is a zig-zag shaped pattern which is composed of three broad moves, sometimes it is also called an ABCD pattern.
The stock chart below shows an example of the measured move on a stock from the stock charts website.
It shows how the move is clearly composed of three separate phases.
Phase one is a concerted sell-off, phase two a gentler correction, and phase three another move down, which is roughly of the same length and steepness and the first move.
The forecasting value of a measured move lies in its completion, for once it has finished the trend often changes in a drastic way.
In the case of GBP/AUD the measured move has finished and so the exchange rate is more likely to start rising.
Another interesting technical feature on the GBP/AUD chart is the two-bar reversal pattern at the lows.
'Two Bars' are a very bullish sign indicating a reversal of the downtrend and the start of an uptrend.
The chart below shows an example of a two-bar reversal from a trader education website, which illustrates how powerful the indicator can be.
Combined with the end of the measured move they make a compelling case for a reversal and a move higher.
We see an initial target at 1.8000 where the 50-month moving average is situated.
Monthly moving averages are powerful barriers – or levels of resistance - to price.
The chart below illustrates this concept on GBP/USD except that it is on a shorter timeframe - nevertheless the principle applies whatever the period.
On it we note the exchange rate moved up, touched and was repulsed by the moving average on four separate occasions.
This ‘repulsing’ characteristic of moving averages means that the 50-month on GBP/AUD is likely to act in the same way.
If the exchange rate reaches it, it will fail to break above and probably be repulsed lower.
This is why we have suggested an upside target just below at 1.8000.
A further reason is the possibility of more downside evolving in the longer-term.
This is due to longer-term cycles which indicate the pair may retouch its long-term 1.4370 lows over the next couple of years.
Medium-Term Chart Backs Up 1.8000 Target
The weekly chart further supports the exchange rate’s expected extension up to 1.8000.
On it we see a strong move from the October Brexit lows which has stalled over recent weeks.
The fact the exchange rate has stalled but not sold off is a sign that the balance of probabilities favour the next move evolving upwards.
The rising MACD indicator (circled below), which measures momentum, is a further bullish sign.
The shape of the rally from the October lows also supports this view.
Most moves in financial markets are composed of three or more waves, however, the rally from October up to the November highs looks incomplete.
I expect it to finish its sideways move and then reach completion with a final wave up to the 1.8000 level.
The 50-week moving average – like the 50-month – is also at 1.8000, reinforcing the level as a target, for the exchange rate is sure to be repelled by two long-term averages, even more so than one.
REMEMBER - if you are making a GBP/AUD payment the rate offered by your provider must be queried. We note a range of between 1.6258 and 1.6696.
Furthermore, if Sterling is to recover in 2017 then you would do well to ensure your FX provider has the relevant buy orders set up in advance to ensure you do not miss your ideal rate.