MENU

The Pound-to-Australian Dollar Rate's Outlook Posiitve According to Forex.com's Razaqzada

exchange rates 2

© kasto, Adobe Stock


GBP/AUD is expected to rise according to two leading analysts.

The Pound-to-Australian Dollar rate is currently trading at 1.7683 after Sterling recently rose following the news that the EU had dropped a clause unfavourable to the UK from its draft transitional agreement.

The news raises the possibility that the two sides of the Brexit process may be closer to agreeing an official transitional period agreement than previously thought, and increases the chances Sterling could surge higher on further positive news in the short-term.

Such an outcome would vindicate the views of two leading analysts who have registered bullish calls on the GBP/AUD exchange rate in the space of the last 48 hours.

Australian bank Westpac's Sean Callow put out a note yesterday forecasting a rise in the pair to 1.82; now Forex.com market analyst Fawad Razaqzada is also bullish GBP/AUD.

"The Pound was performing well against the likes of the Aussie given the recent sharp drop in commodity currencies. So, the GBP/AUD is our featured chart today," says Razaqzada in the preamble to his forecast.

The analyst notes that from a technical perspective, the GBP/AUD pair is in an established uptrend which should continue extending higher after it has completed the current pull-back.

"The GBP/AUD could be on the verge of resuming its upward trend after its recent pullback from the key 1.80 psychological resistance level has worked off overbought conditions," says Razaqzada.

Although the pair formed a bearish candle in the previous week when it peaked and then rolled over this is dismissed as a "false alarm for bulls." It would require a break below the 1.7610 lows to confirm a more bearish phase.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

Instead, Forex.com's Razaqzada expects the to form a 'base' from which to move higher, such as would be the case if it formed a bullish candle.

"But first thing is first: we need to see the formation of a bullish daily candle here on a closing basis," he says.

A break above the 1.8002 highs would lead to a move up to the next upside target at 1.8242 according to Forex.com.

 

Westpac Also Bullish

Fair value models indicate the Aussie Dollar is overvalued and therefore likely to drift lower, says Westpac senior currency strategist Sean Callow.

GBP/AUD is correlated to the Dollar, which is also expected to strengthen, propelling the former higher in the process.

The pair is trading in a range below its historical norm and therefore is likely to drift higher over time.

Interest rates are expected to rise more quickly in the UK than Australia and although Australia has a higher interest rate of 1.5% the UK is expected to catch up, albeit slowly.

Rising relative interest rates tend to support a currency as they increase foreign capital inflows drawn by the prospect of higher returns.

 

Caution Required

Our chart studies suggest GBP/AUD may be forming what looks like a bearish double top pattern on the weekly chart which would indicate the opposite to the two leading analyst's bullish forecasts.

The outline of market action at the recent twin peaks which formed in December 2017 and February 2018 both at exactly 1.8002, we find especially compelling, as it closely resembles the outline of a text book example of a bearish double-top reversal pattern.

The topping pattern is not yet complete, however, and we would need to see a break below the 'neckline' situated at the 1.7094 January lows for confirmation a double top was in progress.

Such a break would then be expected to lead to considerably lower exchange rates and a target at 1.6500.

The bearish divergence between the MACD indicator and price at the two highs is also a negative indicator. 

It shows diminishing momentum on the second peak and therefore vulnerability to weakness.


Commodities in Focus

Part of Forex.com's Razaqzada rationale for expecting the Pound to rise versus the Aussie is that commodities prices are set to fall, yet we are not so convinced.

Iron ore is Australia's largest export and a rise in demand or price tends to drive up the Australian Dollar.

We expect an increase in demand over the next six weeks from Australia's biggest customer China, as Chinese steel producers start to restock before they reopen their operations at the start of April.

The government forced all steel mills in the country to shut down in November 2017 for a 5-month outage, in a drive to reduce pollution and make Beijing more 'green'.

However, winter has passed now and in the run-up to reopening we expect demand to rise both for iron ore and coal as mills start to restock.

As far as Westpac's argument that GBP/AUD is trading in a range that is uncharacteristically low for the pair and therefore is likely to drift higher, the reason, we think it is so low is downwards pressure on the Pound from Brexit uncertainty.

It is highly unlikely that this uncertainty will ease anytime soon, however, so it is one factor which we do not agree will propel the pair higher.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

GBP/USD download banner