GBP/AUD faces key test

Given the possibility for a more meaningful dollar comeback, the pound’s potential strength may become more obvious against other currencies that are also falling against the greenback.

With the dollar staging a broad-based recovery today, the GBP/USD has paused for breath after its vicious rally at the end of last week. But the pound will take centre stage again this week due to a number of UK economic events, including the release of CPI on Tuesday and wages data on Wednesday, and the Bank of England’s latest monetary policy decision on Thursday. Given the possibility for a more meaningful dollar comeback, the pound’s potential strength may become more obvious against other currencies that are also falling against the greenback. One interesting cross is the GBP/AUD given that we also have Australian employment figures and Chinese industrial production data due later this week (Thursday). Thus we could see plenty of volatility in this pair, potentially providing lots of trading opportunities.

Now from a purely technical perspective, the GBP/AUD looks like it may have carved out a bottom. It spent the best part of two weeks trying to move south of the prior low at 1.6270. However, the sellers had a hard time to hold their ground there. In fact, the buyers managed to defend their ground as long-term support at 1.6165/70 held. This level was the last resistance prior to the breakout in March that led to a significant rally. Clearly there was significant buying pressure around this level to have caused that move then. Now back to this level, the buyers have evidently stepped in again. On the weekly time frame, the GBP/AUD looks like it may have formed another higher low. But on the daily time frame it hasn’t broken its market structure of lower lows and lower highs yet. Any move above the most recent high at 1.6550 would put that right. Before we get there, though, the GBP/AUD faces another short-term resistance around 1.6420. Any move below 1.6165/70 would probably be the invalidation point of this potentially bullish outlook. 

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