Australian Dollar Reversal v British Pound Lines up Retest of 2.0

The outlook for the Australian dollar against the British pound has taken a negative turn as a key technical event at the end of March works in favour of the pound.

“The GBPAUD tested major support last week, where 3 Fibonacci retracement levels coincided with the 7 month uptrend channel,” David Coloretti at Westpac tells us.

The test saw declines in pound sterling come to an end with a strong recovery taking place.

Those using GBP to buy the Australian currency are now looking at an inter-bank market conversion of 1.9480.

The year’s high of 2.003 still lies some distance away however and indicates just how far the pound sterling has fallen.

Please note that all FX quotes here are from the wholesale markets - your bank will affix a spread to the rate to derive profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances.

Forecasting a test of 2.0

At the risk of sounding repetitive we point out that predictions of GBP-AUD returning to 2.0 is nothing unique at this stage, as our recently published article on the Aussie attests to.

With a similar call coming in from Westpac it would seem consensus around GBP strength against the antipodean currency is building.

Coloretti says we are potentially witnessing the start of a multi-week rally:

“The rejection of this level was highly impulsive, producing a weekly “hammer” candle. This candle is a typical bottom pattern. A weekly close this week above 1.9232 will complete a further bullish confirmation.

“Important in any reversal is momentum confirmation. In this case the weekly RSI rejected trend line support as price rejected its major support levels.

“This evidence implies a multi-week rally and likely test of the 2015 highs around 2.0000.”

Cliffhanger Election Could Scupper the Rally

Be aware of political risk factors scuppering the technical forecast for sterling.

GBP/AUD is unlikely to reach the February highs above 2.00 in the next few weeks, as AUD benefits at least as much as GBP on a somewhat less bullish USD outlook and investor tension increases over the UK cliffhanger general election on 7 May.

As one of our leader pieces confirms, calling the outcome of the vote is incredibly difficult at this stage and this will have implications for the UK currency.

Nevertheless, “GBP/AUD is likely to be biased higher into Q3 2015 as AUD is capped by weak commodity prices and at least one more RBA rate cut while the UK economy remains strong enough to keep markets leaning towards BoE tightening,” says Coloretti.

AUD-Negative Rate Cut Ahead

The RBA surprised the consensus view by leaving rates on hold in March.

The Australian central bank does have a history of following an interest rate change with a similar move in the next month.

Westpac join consensus and look for another 25bp cut in April, reinforced by the March statement.

While holding steady, the RBA said this was “for the time being”, a phrase which has been quickly followed by a rate change on 8 occasions in the past 5 years.

Be aware though - if the Australian central bank fails to cut rates then the covering rally in the Aussie exchange rate complex will be brutal, indeed it will in all liklihood undo all the technical work done by those analysts we have reported on.