by Jon Beddell
Foreign Currency Market Update – GBP / AUD Update
Sterling dropped like the proverbial stone last week, carving through the July low at 1.7050 and heading straight for the June lows at 1.6750. This support level has so far produced a small bounce, which is not surprising considering we have lost seven cents in seven trading days! The cause of the drop is simple. Stock markets have been on the rebound, prompting investors to take on more risk and buy into high yielding currencies. In recent reports we noted that despite the weak stock markets, the Aussie dollar and other high yielders have managed to tread water versus Sterling. The markets have been viewing the US dollar as the “safe haven” currency of choice, while casting a sceptical eye over almost all other units. Now that stocks are on the up, it’s business as usual. A bad week in terms of UK economic data meant that while other currencies were free to rally against the dollar, the Pound could only just manage to maintain a sideways range, leaving it vulnerable against the high yielders.
Disappointing manufacturing and construction data was compounded by a horrible service sector report that showed activity growing at the slowest pace since April 2009. The service sector PMI gauge fell to 51.3 in August from 53.1 the previous month. A figure below 50 indicates sector contraction. The service sector is watched particularly closely because it represents over 70% of UK economic output, and is a key barometer for the Bank of England’s interest rate setting monetary policy committee (MPC). They meet on Thursday to make their latest interest rate decision, where they will certainly keep interest rates on hold at 0.5%. The weak PMI figure is likely to push them toward an easing bias, with some analysts now speculating that further Quantitative Easing could be in the pipeline. We will get some indication of the MPC’s thinking when the meeting minutes are released a few days after Thursday’s vote.
The Aussie dollar has eased back by a cent today after the Reserve Bank of Australia kept interest rates on hold at 4.5% for a fourth consecutive month, citing an uncertain global economic outlook. Prime minister Julia Gillard won the backing of key lawmakers, allowing her Labour party to retain control of government. Gillard is now free to pursue a controversial new tax on mining companies, a prospect that is also weighing on the currency today.
The technical outlook is extremely precarious for Sterling. The rally that began in May appears to be dead in the water, and we only have the 1.6750 support level protecting Sterling from a return to the 1.6250 lows. Buyers of the Aussie dollar should strongly consider hedging their exposure now to avoid the risk of further downside. Those hoping for a bounce should consider placing stop orders below the market to lock in a “worst case” rate in case of a continued slide.
Related posts:
- Australian Dollar Exchange Rate Forecast – Sterling plunges
- Australian Dollar Foreign Exchange Rate Forecast – Sterling slips despite risk aversion…
- Australian Dollar Foreign Exchange Forecast – Sterling/Aussie dollar in a holding pattern…
- Foreign Exchange – Australian Dollar News
- Australian Dollar Exchange Rate Forecast
