Typically, currency pairs will involve two currencies of countries that have well-developed economies and play a significant role on the world stage. Many of these involve either the USD and/or the GBP, and in this case, it’s the GBP/AUD pair that this article will focus on. The focus here is on why both of these currencies will likely down trend long into the future. While it doesn’t mean that you should avoid all forex trades with them, you should maintain a sober outlook in regards to the fundamentals for these currencies.
In the United Kingdom’s case, the Brexit vote is by far the biggest strike against the stability of the GBP. Already, the currency had declined more than 12% by the eve of the historic vote, which represents a staggering loss by historical standards. Against the USD, by the end of September 2016, it was at a 31-year low. Its value against the AUD isn’t much better. While the Brexit may not actually happen should Article 50 not be served, the fact that the vote for it passed means that it will take years to fully restore confidence in the currency, with GBP/AUD taking a hit as a result.
The standpoint and action of the Bank of England are another points to consider. The BoE favours retaining its loose monetary policy (referred to as Quantitative Easing), but some of its members are beginning to baulk at the length of time that its low-interest rates have been maintained. It is the only major central bank that is actively increasing the level of monetary stimulus it is providing to the economy, which is designed to push the value of the GBP even lower.
Within the GBP/AUD pair, Australia faces a problem of a different nature. Its mining boom, largely fueled by demand from China and India, has helped push the Australian economy to new heights – its per-capita income in nominal terms stands as one of the highest in the world. That said, this boom has resulted in Australia becoming dependent on the BRICs economies for its own fortune, a task that has proven to be increasingly difficult in recent years. Of the four, only India is showing an accelerating trend of growth.
In spite of these fundamentals, the Reserve Bank of Australia (RBS) is committed to keeping interests rate elevated, allowing the AUD to stand strong with the GBP/AUD pair. RBA Governor Battelino states that the past trend of inflation resulting from mining booms demands a more restrained monetary policy and that the underlying health of the economy justifies keeping rates higher. The stance of the RBS is that it wants its currency to remain strong, and more interest rate hikes are likely coming. The strength of the AUD is only going to grow.
In regards to how the GBP/AUD appears, the 10-day moving average of the pair is below the 20, 50 and 100-day moving averages of the spread between the two, pointing to a sudden and major change in the relationship between the currencies. This suggests that the trend is likely to continue in the near future, which should inform anybody wanting to trade the GBP/AUD currency pair.
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Alexander Bowring is a London based writer and a Southampton Solent University Screenwriting graduate. He has worked alongside TV personality and Telegraph feature writer Alison Cork, whilst also having produced content for ITV, This Morning, Canvas8, Who’s Jack, Alison at Home, and Bonallack & Bishop Solicitors. Alexander also has a keen interest in investments.