GBP/AUD overextends

The Australian dollar (Currency:AUD) is on the front foot on Friday morning having registered gains against the key currencies.

British pound due a correction against the AUS dollar

Sean Lee at FXWW says GBP/AUD is looking overbought on a short-to-medium time-frame, a pullback could be due:

"Resistance levels are further away there at 1.6900 making sales at present levels near 1.6700 much less attractive. Wait for any stop-loss driven spikes up through resistance levels and sell into that for a move back below 1.65."

August exchange rate cut and elections could hit AUS dollar

However, the outlook does not necessarily favour the Australian currency, largely owing to the possibility of an interest rate cut in August and the possibility of elections.

Sean Callow at Westpac says:

"Pricing for the RBA’s Aug meeting is stable at -18bp/71%, consistent with Westpac’s view.

"Since the low CPI data, some forecasters have reluctantly joined Westpac in calling for an August cut.

"Political intrigue will heighten this weekend, with many pundits expecting PM Rudd to call a 31 August election.

"To do so he will need to announce this no later than Sunday. Others predict 21 Sep or later. Latest betting has the Coalition increasingly short-priced favourites to win."

Australian dollar regains the initiative

Against the US dollar we see the Aussie appears to have retaken the initiative. Callow explains why:

"Markets lacked firm direction until late NY when USD came under pressure on expectations the Fed might adopt more dovish guidance at next week’s meeting.

WSJ Fedwatcher Hilsenrath suggested that the Fed would discuss options on forward guidance on the funds rate such as specifying a lower bound for inflation that would prevent a rate rise.

"AUD/USD had drifted up from 0.9160 to 0.9220 then rallied as far as 0.9282 after the article," says Callow.