The GBP has been on a tear of late, boosted by a long string of better than expected economic data that has many people looking for monetary policy normalization sooner rather than later in the UK. On the other hand, the Australian dollar has struggled recently thanks to softer economic data and the continued threat of further rate cuts by the RBA. The Aussie has found a bit of a bid of late however and is showing some potential for a serious correction against the GBP.
The rally from 1.4379 which began in mid March hit its peak at 1.7457 in late August, and since then the pair has been trading slightly lower, perhaps forming the right shoulder on a head and shoulders pattern. For those of you who aren’t familiar with head and shoulders patterns, they are a topping pattern and their presence suggests an impending reversal of a pair after a strong rally. We have certainly had the strong rally in GBP/AUD and now the head and shoulders looks to be completely formed. The last thing we need is a break of the neckline which currently sits around1.69. 1.69 also marks the 50 day EMA, providing a nice confluence level for bears, should it break. A move below 1.69 would open up a measured move down to 1.65 or so.
GBP/AUD will be a bit more insulated from the significant news events upcoming later this week, though the pair usually moves down in risk-on environments, though that correlation has been far less consistent of late.
Written by: Liam McMahon, Currency Strategist – GlobalFxClub.com