Pound in "Tailspin" v Australian Dollar as RBA Strikes Surprisingly Optimistic Tone on Economic Outlook

The Pound to Australian Dollar exchange rate (GBP/AUD) has fallen over 1.5% overnight after the Reserve Bank of Australia released the minutes from their July 4 meeting.

It was revealed the RBA is much more upbeat on the economy than foreign exchange traders had previously assumed.

The upbeat quality of the July minutes contrasted with more neutral official statement released at the time.

The minutes quoted RBA officials talking about encouraging growth in the global economy, an improving labour market, stronger public investment and a pick-up in household consumption.

Of special import to the outlook for interest were discussions of what the ‘neutral cash rate’ is, which the RBA estimates at 3.5% - well above the current 1.5% level.

This suggests the current level is extremely accommodative, or stimulatory.

The minutes will make it more likely the RBA will increase interest rates again, although headwinds to contend with which argue against a hike include record high levels of household debt, which would become harder to repay, and the negative impact a stronger Aussie Dollar (the result of higher rates) would have on exports, which are so key to the economy.

Analysts appeared mixed in their conclusions, with some such as Janu Chan of St George Economics, arguing that the minutes only constituted a shift away from a rate cutting milieu, rather than a preparation for a rate hike.

“While today’s data signifies yet another step away from a potential rate cut, the RBA is still not ready to consider a rate hike anytime soon,” said Chan.

#AUD a 'superstar' amongst G10 #forex. Hear more from @ChrisWeston_IG @IGTV VIDEO: https://t.co/LlhoXAXAVi pic.twitter.com/zosTJ3Nrs3

— Jeremy Naylor (@JeremyNaylor_IG) July 18, 2017

Others were more hawkish, with Michael Turner of RBC Capital Markets saying:

"The discussion around neutral rates caught the market off guard,” adding:

“They are not necessarily laying the groundwork for a hike but this would be the first step if they were moving in that direction."

The sharp decline in GBP/AUD was forecast by our week ahead technical studies which saw a probable break below the 200-day MA at 1.6676 as continuing the sharp decline seen during July.

Both the weekly and daily charts show compelling evidence that the pair will probably continue even lower, down to a target at around 1.6200, at a trendline to the downside.

Above: Shorter-term daily chart for GBP/AUD

This would be in line with technical expectations based on the abcd pattern which has formed since the run off from the early May high.

As such patterns tend to show equality in wave lengths, especially of a-b and c-d.

For those looking for an entry we would argue it’s hard to catch a falling knife but a move below the 1.6450 level could provide confirmation and a suitable entry point.

Above: Longer-term weekly chart for GBP/AUD