GBP/NZD Outlook – April 2015

GBP/AUD reversed direction in March, declining by -1.4% for the month. The decline in the cross was largely due to mostly lower than expected economic data out of the UK, while Australian numbers were in line with expectations or better than anticipated. UK economic numbers in March showed the economy was still showing signs of weakness. UK Manufacturing Production declined -0.5%m/m versus an expected increase of +0.2% while CPI came out at 0.0% compared to +0.1% anticipated. Also, the Average Earnings index fell to 1.8% versus 2.2% expected. On the plus side was the UK Trade Balance, which showed a deficit of – 8.4B compared to an expected -9.7B, while Retail Sales increased +0.7% m/m versus +0.4% expected.

The BOE left its Official Cash Rate and the Asset Purchase Facility unchanged at 0.5% and 375B respectively, with unanimous votes for both. The minutes of the decision noted that, “Although monetary policy at home and abroad was only one of the many factors that influenced the exchange rate, especially in the near term, there was a risk that divergent monetary policy trends, as well as stronger prospects for growth in the United Kingdom than in the euro area, might continue to put upward pressure on the sterling exchange rate. This had the potential to prolong the period for which CPI inflation would remain below the target and exacerbate the risk that lower expectations of inflation might become more persistent.”

Australian numbers were mostly in line or better than expected in March, with the highlight being Building Approvals, nevertheless Home Loans were on the weak side. The Australian Unemployment Rate declined to 6.3% from 6.4% while Employment Change was in line with expectations at 15.6K. The RBA left its benchmark Cash Rate unchanged at 2.25% in March and at their latest meeting on April 7th. In his statement, RBA Governor Glenn Stevens noted that, “The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices.”

Traders will be watching the RBA Monetary Policy Meeting Minutes on the 21st and the MPC Meeting Minutes on the 22nd for indications on monetary policy and the direction of the cross. Due to pressure on the UK economy, the outlook for the cross is negative in the near and mid terms and neutral long term.

GBP/AUD rose overall since finding support at the 1.7215 on September 7th of 2014. The cross’ latest up move has taken the form of a series of overlapping waves that is more characteristic of corrections than impulses. The most recent upswing of this rally briefly touched 2.0029 on February 11th before correcting down to 1.8825 on March 22nd and then bouncing to 1.9654 in early April.

From a long term perspective, GBP/AUD has been correcting higher after falling from its October 2008 peak of 2.6695 to its 1.4381 low of March 2013. The latter part of this decline formed a descending wedge pattern with notable resistance in the 1.6185 to 1.6491 region that the recent upside correction in the cross broke out of in May of 2013. GBP/AUD pushed up beyond the 23.6% Fibo level of its previous long term 2.6695 to 1.4381 drop at 1.7287, and then briefly exceeded the 38.2% Fibo level at 1.9085, but fell back below the latter and corrected down to the 23.6% Fibo level again. GBP/AUD again broke above the 38.2% Fibo level in late January, sending the cross up to 2.0029, although it then fell to re-test the 38.2% level before bouncing from it. As long as the cross exceeds the 38.2% level, it sets up a target at the 50% Fibo level of 2.0538. In addition, a rising supportive trend line can be drawn through the key 1.4410 and 1.7215 reversal lows that presently provides support for the cross at the 1.8377 level.

GBP/AUD traded over its rising 200-day Moving Average since November, and now reads at the 1.8638 level to support a bullish medium term outlook. Also, GBP/AUD’s 14-day RSI showed waning upside momentum in the 1.9646/54 region, possibly contributing to its subsequent drop. It reads in central neutral territory at 48.67, which should not impede moves either way.

Overall, the near term outlook for GBP/AUD has neutralized, while the medium term outlook remains bullish toward the cross’ 50% Fibo level of 2.0538 of its long term decline, as long as gains above the 38.2% Fibo level of 1.9085 are sustained.