Between May and July 2016, the Australian dollar strengthened against the major rivals such as the US dollar and the British Pound. The rise of the Aussie was aided by the strong economic growth of 3.1% y-o-y in the first quarter of 2016. In particular, the rally against the Pound was spectacular. The outcome of the Brexit referendum was only one of the reasons for the Pound’s downfall. The decline in the unemployment rate and an increase in household spending in Australia also contributed to the decline of the GBPAUD pair. However, the rate cut announced in the first week of August, weak inflation, and a slowdown in China ensured a recovery in the GBPAUD pair. As explained below, there are reasons to believe that the uptrend in the GBPAUD pair will continue in the near future.
High-interest rates and lack of sufficient dovish comments continue to keep the Australian dollar strong irrespective of the nature of the economic data that emerges out of Australia. However, analysts believe that the Australian dollar is on the verge of decline as the price of iron ore, the country’s largest export revenue earner, is showing signs of a sharp fall. The price of iron ore ended August at $58.97/ton, the lowest since July 27th. The vice-president of the China Iron and Steel Association recently stated that the production will continue to decline during the next three years. This clearly indicates that there will be no respite for the price of iron ore. In fact, the analysts at Morgan Stanley believe that the average price of iron ore will remain at $46 this year and at $42 in 2018. An oversupply of 33 million tons and 100 million tons is seen in the years 2016 and 2018 respectively.
In the case of the UK, the economic data indicate that so far the country is not much affected by the outcome of the Brexit referendum. The Markit’s manufacturing PMI (Purchase Managers’ Index) reading hit a 10-month high of 53.3 in August. The five-point jump from the previous month’s reading represents the highest sequential increase in the UK’s PMI reading. The analysts expected a PMI reading of 49.1.
The GBPAUD pair has firm support (S1) at 1.7240. The MACD is rising firmly above the zero line. Thus, we can expect the currency pair to rise till the next resistance (R1) at 1.8150.
So, it would be better for a currency trader to take a long position near 1.7550 in the GBPAUD pair. A stop-loss order can be placed at 1.7340 to prevent large capital erosion. The profit for a long position can be taken near 1.8050.
It would be wise on the part of a binary trader to purchase a one-touch call option to gain from the probable rise of the GBPAUD pair. The strike price for the suggested call option trade should be about 1.8030. Having the contract expiry date at the end of September would ensure that the currency pair gets enough time to reach the desired target.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
