The Australian Dollar to GB Pound exchange rates have seen some changes in the past few weeks.
Once again the debate raged as to whether the Reserve Bank of Australia would cut interest rates by 0.25% or 0.5% at their 5th of June meeting, following May’s 50 basis point cut. They actually cut rates by 0.25% to 3.5% which is the lowest levels since the height of the financial crisis.
The ensuing minutes from the meeting, suggested that the decision to cut rates further was finely balanced, as the economic news in Australia had been mixed but the deterioration of the situation in Europe warranted further action.
The RBA suggested “they expect the impact of the recent rate cuts to begin filtering through to the wider economy in the coming months” (it is commonly accepted that any adjustment to interest rates takes approx 18 months to have an impact on the wider economy).
With inflation expected to remain close to 2% (the RBA have a target range of 2-3%) over the next year or so the central bank felt there was scope for monetary policy to be more supportive for the domestic economy.
The Australian economy has created over 100k jobs since the start of the year and grew by a much stronger than expected 1.3% compared the last quarter of 2011 (or 4.3% compared to Q1 2011).
Despite this stronger than expected data there are still concerns a two tier economy is forming with the resource sector and it’s supporting industries booming, whilst other industries continue to struggle in the face of concerns over the global economy.
With interest rates cut by 0.75% over a couple of months, it looks as though the RBA will sit tight on any further rate cuts until the situation in Europe becomes clearer.
The less than expected rate cut and stellar GDP figures combined with a slight improvement in the situation in Europe (the impending break-up of the Euro Zone appears to have been averted for now) pushed GBP/AUD through support at 1.58 which was highlighted in last months’ post as a key level.
We have seen the market test the 50% Fibonacci level (1.537) over the course of the month before rallying. Unfortunately, we’re now trapped beneath resistance at 1.5562. However a break of this level should see a test of 1.58 as an initial target. However if support at 1.537 fails then we would expect 1.5178 and even 1.50 to be tested.
For those not familiar with Fibonacci levels; Fibonacci retracements are percentage values which can be used to predict the length of corrections in a trending market.
Most popular retracement levels used for the forex trading are 38.2%, 50%, and 61.8%. In a strong trend you can expect the currency prices to retrace a minimum of 38.2 percent; in a weaker trend corrections may go as far as 61.8 percent.
The 50 % is the most widely monitored retracement level and is a common area to buy in the up trends or sell in the down trends. If a correction exceeds one of the retracement levels – look for it to go to the next (e.g. to 50% after the 38.2% level or to 61.8% after the 50% level).
Whenever the prices retrace more than 61.8% of the previous move (on a closing basis) you can expect them to return all the way back to the beginning of the trend.
Australian Dollar Buyers
As long as the market remains above the 50% Fibonacci level at 1.537, this move could still be corrective in nature. With this in mind, I would consider placing orders in the 1.57 region for any short term requirements with a stop loss order below 1.537. For those of you with more time to play with, I would suggest placing any long terms orders in the 1.60 region as this below the recent highs and essentially the best we have been able to achieve in over a year.
Australian Dollar Sellers
Resistance at 1.556 is the key, as long as we remain below this level there is a chance of a move back towards 1.50 and the 35 year low of 1.45. Any short term requirements should be covered in the 1.537 region. If you have more time to play with, I would look to place a stop loss order above 1.556 as break of this level should see a test of 1.58 and possibly above.
Thanks to Halofinancial who helped contribute towards this commentary