GBPAUD SHORT Risk RisingThe sharp pullback in GBP/AUD raises the risk of a deeper setback in the short term.
GBP/AUD’s sharp retreat in recent days has made the cross vulnerable to a deeper setback in the near term. This follows a retreat from strong horizontal trendline resistance at about 1.9200 (see chart). The 14-week Relative Strength Index has retreated from overbought conditions – levels that have been associated with a pullback in the cross. GBP/AUD is testing a vital floor at the early-May low of 1.8590, so some rebound can’t be ruled out. But chances are that it won’t hold the support for too long. Any break below could open the door toward the early-April low of 1.8250.
After a spectacular run of outperformance since February, UK macro data have generally underwhelmed since mid-May, according to the Economic Surprise Index. Nevertheless, the strong-than-expected data since the start of the year has prompted upgrades to the economic outlook for the current year. Meanwhile, the slower-than-expected moderation in UK inflation in April has raised the odds of a Bank of England (BOE) rate hike this month.
BOE hiked its benchmark rate by 25 basis points in May after pausing in April, and the market is pricing in almost four rate hikes by the end of the year, taking the terminal rate to 5.41% from 4.50% currently. The next week bring UK jobs, GDP, and manufacturing output data ahead of the BOE meeting on June 22, which could stir things up a bit for GBP. Until then, the pound could be due for a breather after a spectacular run against some of its peers.
