GBPAUD may be heading to 1.9000

It has been an interesting few days for GBPAUD, with the pair bouncing off a support zone around 1.7900 earlier in the week before creating a new yearly high overnight. A combination of pound strength and aussie weakness has been behind the massive surge in GBPAUD this week.

The pound has been a currency of choice for traders looking to play US dollar weakness, a trade which received another small boost with the release of Osborne’s Autumn Statement overnight. UK growth forecasts were revised higher for this year and next and the unemployment rate is expected to fall. The positive impact on the GBP was only mild, but it was bolstered by softer than expected US ADP employment numbers.

Meanwhile, the Australian dollar has sunk to a new four-year low against the USD dollar on the back of increased speculation that the RBA will cut interest rates ever further. This wasn’t helped by very soft Q3 GDP numbers yesterday. GDP expanded by a measly 0.3% last quarter, completely missing an expected 0.7% growth rate. The more disturbing news is that Australia is now in a technical income recession, with real gross domestic income falling 0.4% last quarter, after falling 0.3% in the prior quarter.

The data highlights the problems facing the RBA as it attempts to grapple with wanning mining investment and soft domestic demand, while also trying not to stock further price pressure in the property market. The is also the threat that Australia’s last line of strong growth, its still strong export market, will collapse under worsening economic conditions in China, Australia’s biggest trade partner.

It was too long ago that Australia was expected to begin tightening monetary policy around the same time as the BoE, but not anymore. It’s true that the market has recently pushed out its expectations for higher rates in the UK and the BoE isn’t expected to raise interest rates anytime soon, but the BoE is now expected to become hawkish much sooner than the RBA due the aforementioned weaknesses in the Australian economy.

This story may have further run, especially if Australian economic data continues to disappoint. As we have explained previously, the RBA expects that a weaker Australian dollar will offset softness in parts of the economy. Yet, this is only really true if the weakness wasn’t the result of falling commodity prices and soft economic numbers. In fact, on a trade-weighted basis the Australian dollar is stronger than it was at the beginning of the year, thus it would likely have fall further before the RBA becomes more comfortable with the level of the exchange rate.

From a technical standpoint, a confirmed break of resistance around 1.8700 would strengthen our bullish fundamental outlook for GBPAUD, especially given how easily AUDUSD is falling. There is a bullish crossover in weekly MACD and RSI is entering bullish territory. Beyond here we are eyeing another import resistance zone above 1.9000 – high since 2009.