How High Can The GBPAUD Go?

January 21, 2014

Right now, the AUD is weak. Thursday’s employment report sent alarm bells ringing, equating to the AUDUSD hitting a three-year low. On the other hand, optimism regarding the UK economy is high, with Gulf News reporting that the UK is set to become the best performing major economy for the next two years.  On Friday, the UK posted their most impressive retail sales result in nine years.

Collectively, both pieces of economic news being released at the same time has led to some insane movement for the GBPAUD. In fact, the pair has increased by over 600 pips in a matter of days. The GBPAUD now sits at an all time high, after pushing through the 1.8643 resistance level. This leads me to speculate, how high can the GBPAUD go?

From a technical standpoint, it is difficult for me to envisage a potential value. After all, the pair has just passed an all-time high 1.8643 resistance level.  However, what surprises me, is that despite this pair accelerating 600 pips in a matter of days, the RSI is still showing no signs of intense buying pressure.

Despite there not being a clear resistance level to target as a take profit, I have noticed that a previous minor resistance level at 1.8552 would make a comfortable stop loss, in case we witness a sudden pullback. However, bearing in mind the fundamentals listed below, a pullback is unlikely.

My current thoughts on the future direction of the AUD is bearish. Thursday’s dismal employment report inspired a rapid sell off. Other problems Australia faces but is not limited to includes GDP missing expectations, a steep decline in their mining industry and the IMF projecting record high unemployment levels in 2014.

Equally, there are re-emerging concerns that China’s economic growth is slowing, leading to a future decline in Australian exports. The RBA may seize their chance and use a dovish tone at their next meeting. Policy makers will likely point towards an over-valued AUD, while mentioning currency intervention techniques, to accelerate the process of devaluing their currency.

Conversely, I am bullish regarding the UK currency. December’s retail sales result finished an outstanding 2nd half of 2013 for the United Kingdom. Jobless claims have been declining by tens of thousands every month for 13 consecutive months.

Additionally, it is expected by economists that this Wednesday, the UK unemployment rate is going to be pronounced at 7.3%. The fundamental essence this holds is that the BoE have repeatedly told us for months that they will review their interest rate policy once the UK unemployment rate hits 7%. This will make Wednesday’s BoE’s minutes an interesting read.   

To conclude, there are valid reasons to be concerned about the future direction of the Australian currency. Poor economic performances, alongside an imminent record high unemployment rate will trigger an RBA response. The RBA will want to further devalue the Australian currency. A lower valued currency will give the Australian economy a platform to start rebuilding.

On the other hand, UK economic performances are surpassing expectations. Inflation is finally at a controllable level and there is a government campaign to increase minimum wage by just over 10%. The UK unemployment rate is now edging closer to the BoE target threshold, and an increase of interest rates could be on the horizon by the end of 2014.

Collectively, Australia’s current problems, coupled with the UK enthusiasm is leading me to believe that the GBPAUD will continue to surpass record highs.

Written by Jameel Ahmad, Research Analyst with Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX.

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