GBP/AUD has been rising steadily in line with the decline in AUD/USD since Mid April. That has been the main driving force for most part of May, but GBP has been undeniably getting stronger since the turn of the month. GBP/USD has bounced off 1.50 round number support, and traded back above 1.52 interim resistance. Currently we’re trading above 1.54 resistance and targeting 1.56. The opposite is true of AUD/USD, which is continuing its torrid run lower, with 0.96 broken and heading towards the final vestige of support found around 0.94.
A large part of GBP rally in June can be attributed to the recent positive economic data. Purchasing Manager Index for Manufacturing, Construction and Service were all better than expected. The British Retail Consortium data has also rebounded positively from -2.2% to 1.8% M/M, higher than the expected 1.3% to hit a perfect streak of better than expected data this week. This is in high contrast to Australia who had to content with a lower than expected GDP growth rate, coupled with worse the shrinking manufacturing sector in China which its exports are highly dependent on. The huge disparity between the improving UK fundamentals vs the weakening Australia economy result in a more than 1,600 pips move from April lows to current 1.63 levels.
From a technical perspective, yesterday’s rally is spectacular. Price managed to break a series of strong resistance; making short work of the Rising Channel Top, which happens to be the confluence with 1.60 round number psychological level, and even manage to clear 1.62 which is the previous swing high back in May 2012. However, this move appears to be highly extended, with price embarking on a bullish momentum not seen previously. The problem with such an extended move is that the pullback may be equally severe. But in order to trader lower, bears will need to break the 1.62 resistance turned support. If price fail to break 1.62 right now, but instead linger around current levels, it is possible that the rising Channel Top may help to push price higher after Mid Jun to continue current rally once more.
With Bank of England rate decision coming, bears will have an even tougher job as the likelihood remain slim for the MPC to have a majority vote for rate cut (highly unlikely) and/or an increase in Asset Purchase Target (less unlikely but still remote). This would have a bullish impact on GBP and that may be enough to allow price to hold off any pullback pressure, or potentially even reach higher highs on the back of the announcement. Traders can also use this opportunity to gauge the underlying sentiment above 1.62 based on price action after BOE decision. If price is unable to hold onto gains post a bullish BOE outcome, the implication will be that bears are highly robust and the likelihood of 1.62 being tested will increase – vice versa.
Nothing much can be gleaned from the hourly chart as all it tells us is the fact that price is heavily extended as well. Stochastic readings have been staying deep within Overbought region for a long time, and despite readings crossing the Signal line, current momentum makes it hard to make an assertion that a bear cycle is currently ongoing. Similar to Daily Chart, the possibility of a move back towards 1.62 remains, but preferably price will need to break 1.62 in conjunction with Stoch reading breaking 80.0 to establish a stronger case for a bear cycle.