GBPAUD Under Pressure
Despite an impressive rally at the start of the year, the COVID-19 crisis has seen a devastating reversal in GBPAUD which has now fallen 14.26% from 2020 highs and is now -4.64% on the year. The main driver behind the stark reversal in GBPAUD is the firm performance in AUD over recent months. Despite its close ties to China which initially saw it heavily sold as news of the virus broke, over the last three months as much of the world moves into the post-lockdown stage of the virus battle, AUD has been the lead performer in the G10 bloc, rising 11% against USD. With GBP only managing a 1% gain on the Dollar, the bearish trend in GBPAUD has gathered pace over Q2 and the pair is now fast approaching a key long-term level at 1.7605 (2019 lows).
RBA Cautiously Optimistic
Australia was one of the least affected nations in terms of virus numbers and death toll with the nation having entered a strict lockdown immediately when the first case was noted. The RBA was also the first central bank to ease among the G10 and has now cut rates twice to record lows of 0.25%. In its latest monetary policy meeting this week, the RBA struck a mostly optimistic view. While downside risks and uncertainty in the outlook were noted, the bank was keen to highlight the rebound in the economy and improving financial conditions.
The damage to the UK economy has been significantly worse than that suffered in Australia, which was far quicker to exit lockdown. The UK economy recorded a 2.2% contraction in Q1 while Australia saw just a 0.3% fall. Looking ahead, many banks are forecasting the UK economy to contract by 8.5% over the year as a whole while the Australian economy is forecast to contract by just 4%.
Parts of Australia Back in Lockdown
Strength in AUD has even persisted over recent weeks amidst fears of an emerging second wave of the virus. Parts of Australia, including Victoria and Melbourne have now been returned to lockdown. The main concern is that the virus will spread to the nation’s capital, leading to a further lockdown there. However, the Australian government has been quick to close the border between Victoria and New South Wales and is carefully managing flights to avoid such a scenario. With global equities markets shrugging off fears of a similar second wave in the US, to remain supported, AUD continues to derive support from better risk sentiment.
AUD Pullback Opportunities
Given the extended downside move in GBPAUD, the main opportunities will be found on pullbacks. Given AUD’s sensitivity to equities movements, any downside corrections in risk assets will likely create opportunities for longer term players to reload GBPAUD shorts. News of any further lockdowns in Australia specifically in Sydney could also create downside moves in AUD which GBPAUD traders should monitor.
GBPAUD (bearish below 1.8658)
From a technical viewpoint. GBPAUD has now broken down below the yearly pivot and the rising trend line from mid 2017 lows. Price is now fast approaching the yearly pivot at 1.7752 with the 1.7605 structural support sitting just beneath. this will be a key area to note and could see some interim demand. However, while some upside correction is likely given the scale of the decline, while price remains below the yearly pivot, the medium-term bias remains bearish. The next downside targets are .17605, 1.7195 and the long-term bullish trend line from 2017 lows.
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