Why the Pound-to-Australian Dollar Rate Could be at the Start of a Recovery

- GBP/AUD's relentless downtrend could be fading
- Hantec's Perry sees signs of life for GBP bulls
- But "still very early for the prospects of recovery" on GBP/AUD

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The British Pound has now fallen in nine of the past 11 weeks as an entrenched rally in the Australian Dollar forced the GBP/AUD exchange rate from highs at 2.05 in early April back down to a low of 1.8058 in early June.

Given a market adage that 'the trend is your friend', an obvious expectation would be to expect further losses for Sterling, however another adage goes that 'the trend is your friend, right until the bend at the end'.

Could it be that the GBP/AUD exchange rate has finally reached a bend, that could allow Sterling to snap back and recover some of the ground lost over recent weeks?

Richard Perry, an analyst at Hantec Markets has been watching the GBP/AUD chart and has come to the conclusion that there could indeed be early suggestions this market is looking to turn around.

"For over 10 weeks, the Aussie has lorded it over sterling on the performance charts. However, could there about to be a shift in this relationship? As support has formed at 1.8055 in the past couple of weeks, the cross of GBP/AUD recently broke a well-defined downtrend," says Perry.

Suggestions that the Australian Dollar could be about to see its outperformance of Sterling challenged would fit in with the view of a number of institutional analysts who tell clients that the Australian Dollar's recent bout of appreciation is starting to look stretched, and some pullback is warranted.

"With the bar for positive surprises set quite high, the AUD still dealing with the sense that the recent rally was overdone and an unresolved (and very dangerous) diplomatic spat with China creeping in the background, we don’t expect AUD to be back on investors’ preference list... even if risk remains supported," says Francesco Pesole, FX Strategist at ING.

Perry says signs of exhaustion in the Aussie Dollar's rally are evident on the GBP/AUD chart, where the re-emergence of positive candlesticks in the past week or so has helped to bolster this support.

"The question is whether this is a consolidation before the next lurch lower, or the start of a recovery," says Perry. "For that, sterling bulls must look to a breakout above 1.8450 which, if seen on a closing basis, would be a pivot resistance breakout, but also complete a small base pattern which would imply around +400 pips of further recovery."

Perry says momentum indicators are starting to shift in favour of Sterling, with the Relative Strength Index and Stochastics both picking up.

"But it is a bull cross buy signal on the MACD lines which is really notable," says Perry.

For the recovery to really get going the analysts says the RSI needs a position above 50 to suggest the bulls are backing the move.

"They can start, with a close above the falling 21 day moving average (today around 1.8360) which has been a strong gauge for the outlook of GBP/AUD pretty much throughout 2020. The hourly chart suggests that current outlook is one of consolidation," adds Perry.

In addition, building higher lows from support at 1.8145 will help to improve confidence now.

"It is still very early for the prospects of recovery on Sterling/Aussie, but the interesting developments suggest it is a market that could well be on the turn and is definitely one to watch," says Perry.