Despite the bearish sentiment created by Brexit, the Pound ended stronger against the Aussie at the end of 2017, compared to a year ago. From a level of about 1.7100 in January 2017, the GBPAUD pair had appreciated by about 200 pips to end the year at 1.7300 levels.
However, the Pound begins the year with a bit of uncertainty created by the European Union’s postponement of trade talks to March. That is expected to have a negative impact on the Pound. On the contrary, the Aussie ended December on a strong note due to a recovery in the price of commodities. Thus, due to the reasons given below, we expect the GBPAUD pair to decline in the week ahead.
After falling to a low of about $53 per ton a few months before, the price of iron ore has recovered smartly to end the year at $72.62 per ton. The Chinese mills were closed for winter to bring down the air pollution, as per the government order. Further, most of the steel mills using outdated technology and lower grade iron ore are being closed gradually by the government.
That has a positive effect on the price of steel. Analysts expect the price of iron ore to dip mildly in 2018, but not to the extent of creating a panic. In fact, UBS has upgraded the average price outlook (2018) of iron ore to $64, representing an increase of 7% from the earlier forecast. Iron ore is the top export revenue earner for Australia.
In the recent monetary policy meeting held in December, the Reserve Bank of Australia held the interest rates unchanged at 1.5%. While the chances of a rate hike in 2018 is quite low, the prevailing interest rate is certainly higher than other developed economies in Europe. The interest rate differentials continue to support the Aussie.
The UK continues to suffer from wage growth that lags behind inflation. The situation is likely to remain unchanged in 2018, according to the recent forecasts. In fact, the country is expected to end at the bottom of the 32 OECD countries as far as wage growth is concerned. Further, the number of working people fell by 56,000 to 32 million in 2017.
The Office for Budget Responsibility expects the unemployment rate to increase over the next five years. According to analysts, inflation is likely to cool down to the targeted level of 2% in 2018. In case that does not happen, we may see a rate hike of about 25 basis points. Economists believe that interest rates would range between 0.50% and 0.75% in 2018.
Thus, strong commodity prices and interest rate differentials favor the Aussie, while Brexit related uncertainty and poor wage growth is expected to keep the Pound weak for the short-term.
As seen in the price chart below, the GBPAUD pair has broken the ascending channel. Technically, the lower band of the channel will now act as the resistance. The MACD indicator has fallen below the zero line. That reflects a bearishness in the currency pair. So, we can expect the GBPAUD pair to trend downwards in the days ahead.
In order to gain from the downtrend, we wish to open a short position in the Forex market near 1.7320, with a stop-loss order above 1.7350. To cover the short position, we will place a buy order at 1.6980 where the next major support exists.
Additionally, we may also invest in a put option to gain from the bearish trend seen in the currency pair. The put option should remain valid for a period of one week. Further, we will enter the trade only if the pair changes hands near 1.7320 in the currency market.
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.
