Can GBP/AUD Go Any Higher After Hitting 1.82 Target?
- Analysts converge on bullish forecast for the pair despite it looking overextended
- Wait for pull-back before going long advise trading instructors
- Morgan Stanley sees upside well beyond most forecasters' horizons on easing Brexit and data differentials
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The Pound-to-Australian Dollar rate has exceeded our most recent forecast target at 1.8200, mostly as a result of the Pound rising after the news on Monday that the UK had agreed a transitional deal with the EU.
The deal would lessen uncertainty for businesses during the implementation period and bring parties one step closer to agreeing a comprehensive bespoke trade pact which would be of mutual economic benefit.
Whilst this has been thrown into doubt today (Wednesday, March 21) with the latest news about Spain withdrawing support for the transition period because there was no carve-out for Gibraltar, the Pound has managed to hold its own and GBP/AUD is still up on the day.
The move is also aided by homegrown Australian Dollar weakness.
A poor string of economic data releases including lower-than-predicted GDP and business confidence data, and even mutterings that the Reserve Bank of Australia (RBA) might be considering cutting interest rates rather raising them - as had always been the assumption - combined with falling commodity prices has hit the Aussie hard of late.
Yet as GBP/AUD starts to look off-puttingly overstretched after its last marathon run higher, we ask if it is now time to take profit and leave the party early or does GBP/AUD have further still to go?
More Upside After Pull-Back
Expert trading instructors Trade With Precision (TWP) highlight GBP/AUD as one of two pairs which still have excellent bullish potential. In fact they single the pair out for special treatment in a newsletter out this morning.
They note, for example, how the pair has now finally broken above a previous glass cieling level at 1.80, which in itself is a reaffirmation of animal spirits.
"After several weeks of finding resistance below the strong level of around 1.80, GBPAUD has finally broken above its consolidation area with strong bullish momentum and continued to push higher to place a new higher high."
(Image courtesy of Trade With Precision)
As all good chart analysts know, you have to look at prices on multiple timeframes - not just one timeframe - including monthly, daily and hourly, before deciding whether to make a trade. This is because when a pair is in a trend on all timeframes it reinforces the validity of that trend and the probability it will continue, as seems to be the case for GBP/AUD.
"The market is in an uptrend on the daily, weekly and the monthly timeframes, and is currently overextended from its MA's," says TWP.
The mention that is is overextended from its moving averages is a warning that it will probably now pull-back, but from diminishing the pair's potential, TWP see this 'pull-back' as providing an opportunity to enter the uptrend at a better price.
"A pullback to test this breakout level around the 1.80 round number from above, could see the market back in the buy zone, and we will be looking for a small bullish candle rejecting this area," says TWP.
As is often the case with financial markets old levels which capped price growth once broken tend to become new levels of support, putting a floor under price and preventing weakness - as seems to be the case with 1.80.
Yet although recommending an entry point to join the uptrend, TWP do not ultimately calirify an exit or any upside targets, and for that we have to look elswhere.
All the Way to 1.8500 and Beyond
Also bullish about the Pound versus the Aussie are analysts at investment bank Morgan Stanely who do go as far as establishing an upside forecast for GBP/AUD, saying they expect the pair to rise as far as 1.85 and even evntually 1.87.
"Redeker and the Morgan Stanley FX team recommended to clients last week that they bet on a further rise in the Pound-to-Aussie rate, entering a "long" trade at around 1.7760 and targeting a move up to 1.87. They suggested a stop-loss at 1.7570," said PSL editor James Skinner in a recent report.
The main impetus behind the upmove is expected to come from a transition period being voted through by the EU council at its summit meeting on Friday, March 23.
Sub-par Aussie data and the unlikelihood of the RBA raising rates anytime soon are also likely to wiegh on the Aussie, says Redeker.
The outlook for interest rates, the driving force of the currency markets, is for faster gains in the UK than in Australia.
Higher interest rates or their expectation increase foreign capital inflows due to the greater returns on offer, which in turn translates into increased demand for the home currency.
According to overnight index swaps, which provide a market-based probability of how much rates will rise in the future, there is a 60% chance of one 0.25% rise in Australia by April 2019, compared with an 84% chance of two hikes in UK in the same period.
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