GBP/AUD Revs Its Engine For A Break Of December's Low
Faraday Research | Jan 04, 2018 01:59AM ET
It’s probably fair to say that the British pound exceeded expectations of many in 2017. By the close of the year, GBP had rallied 9.53% against the flailing greenback, 7.4% against NZD and 5.6% against JPY. Yet whilst these are admirable results from a currency which was poised to only go lower (thanks to Brexit) we have now witnessed a momentum shift against commodity currencies since the beginning of December.
A few things occurred around this time which favoured commodity currencies: CAD was supported by the BOC hike and strong hint that less stimulus may be required (Strong PMI’s and housing builds also did their bit of course); AUD was domestically bolstered by firm employment data; NZD experienced short covering as the ‘market friendly’ Adrian Orr was named as the next RBNZ Governor. All three were supported by higher commodity prices and a weaker greenback.
Unfortunately for sterling, traders have found less reason to buy GBP without a fresh catalyst. As GBP has depreciated against AUD the most compared to CAD and NZD since the beginning of December, we’re on the lookout for a short opportunity on GBP/AUD. That is not to say opportunities may not present themselves on GBP/NZD or GBP/CAD though, but relative strength and trend analysis currently favour GBP/AUD shorts.
Looking at the daily chart of GBP/AUD we can see it was the 8th December when the 2017 high formed at 1.7997. This was its last hurrah of the year as a momentum shift took-place and losses began to unfold. Over the subsequent 13 session only two minor up-days were seen as part of a shallow pullback, which merely served as a minor pause prior before breaking the August trendline. By the end of the mini-rout on day 13, GBP/AUD had shed -4.4% and support was found at 1.7211. Will this level continue to hold as support? Recent price action begs to differ.
Following a relatively small pullback to 1.7416, yesterday’s bearish engulfing candle suggests a swing high may have formed, or at the very least is making an attempt of one. What makes this candle of more interest is how the session opened just beneath a resistance zone and an attempted rally above it failed to hold, before rolling over as a mini bull-trap. That is also closed at the low of the session and its range was outside the prior days’ also further highlights the bearishness of this one session.
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So our attention now shifts to 1.7211, as a break beneath the December low opens up a potential run for 1.6896-928. This is also where patience becomes a virtue. As the bearish engulfing candle was the widest ranging day in 7 session, there is the risk that the subsequent candle may not be as volatile, or even retrace following a break lower. So perhaps a preferable outcome is for prices to stabilise above 1.7211 before providing a decisive break lower, where we’ll then seek a trade entrance in the form of price compression or low volatility retracement.
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