Pound signals downtrend on soft inflation data

The Pound turned bullish against the Aussie last week when Kristin Forbes, an external member of the UK monetary policy committee, stated that Bank of England could soon consider raising interest rates. She argued that economic downturn usually happens when there is a shortage of money flow.

However, the outcome of the Brexit referendum did not have any impact on the credit scenario. On the basis of this theory, Forbes argues that the economists’ have made a judgement error and a downturn on the basis of Brexit may not come at all. So, considering the fast rise in inflation, the central bank should look at the possibility of raising interest rates.

The statement made by Forbes saw the GBP/AUD pair reach a high of 1.6480. However, the cross has lost some of the gains in the past few trading sessions. We forecast a deeper decline of the GBP/AUD pair in the near future, due to the reasons mentioned below.

Reuters

The UK inflation data released on Tuesday did not back the arguments made by Forbes. According to the Office for National Statistics, the consumer prices increased 1.8% y-o-y in January, compared with a 1.6% rise in the previous month. However, it was lower than analysts’ estimates of 1.9% increase. The discounts offered by clothing stores were primarily responsible for inflation to miss analysts’ estimates.

On the contrary, In China, the consumer price index increased 2.5% y-o-y in January, against market’s expectation of a 2.4% increase. Notably, the CPI reading increased 2.1% y-o-y in the previous month. China is the most important trading partner of Australia. So, a rise in consumer prices in China would naturally strengthen the Aussie.

Iron ore, which is the major export revenue earner of Australia, once again fooled analysts by climbing to a high of $92.23 per ton on Monday. It is the highest recorded price since August 2014. The commodity has defied analysts’ calls of a peak in price, several times this year. The Australian government had forecasted the price of iron to stay at about $55 per ton in 2016-2017. Now, the prevailing high price is expected to bring several billions of additional revenue, in the form of taxes, to the government of Australia. On the basis of the above details, we anticipate the GBP/AUD pair to trade with a negative bias in the short-term.

The GBP/AUD pair faces resistance from sellers near 1.6420. The negative reading of the MACD indicator confirms the weakness in the Pound. Thus, a trader can anticipate the current downtrend to continue.

To gain from the probable downtrend, a speculator can go short in the GBP/AUD pair near 1.6160, with a stop loss order above 1.6300. The profit can be booked near 1.5950.

By purchasing a put option (/low / below), a binary trader can look forward to gain from the probable decline of the GBP/AUD pair. When the pair trades near 1.6160, the contract can be bought through any of the reputed binary broker’s platform. Allowing a time period of at least one week for the expiry of the contract would increase the chances of ending the trade in the money.

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