Pound to rise on unwinding of ‘hard-Brexit’ trades

An increase in the price of iron ore to a 30-month high of about $100 per ton enabled the Aussie to gain strength against the Pound in the past few trading sessions. The hard-Brexit scenario in the UK also assisted the GBP/AUD pair’s decline to a low of 1.5988.

On Wednesday, the Australian Bureau of Statistics (ABS) announced that the economy grew 1.1% in the quarter ended December 2016. Analysts had expected the economy to expand only 0.7%. More importantly, the reported growth avoided a technical recession. It can be remembered that the Australian economy contracted 0.5% in the previous quarter.

Even though the reported figures were better than estimates, still, the Aussie is not expected to strengthen against the Pound due to the arguments provided below.

Al Jazeera English

The GDP figures announced by the ABS indicate that the economy has grown 2.4% on a y-o-y basis. However, it is still below the historic average of 2.75%. Furthermore, the quarterly and annual growth trend is only 0.3% and 1.9% respectively. The employee compensation has also declined by 0.5% in the latest quarter.

Echoing the concerns, Paul Dales, the chief Australian economist for Capital Economics, stated that the economy expanded only 0.6% in the second-half of 2016 and the decline in the mining investment is not yet over. The record low wage growth and decline in the building approvals threaten household spending. Thus, it can be inferred from the argument that fundamentals do not favour a steep rise of the Aussie at this point in time.

The Pound has declined in the past few days on Brexit related concerns. Thus, from a trader’s point of view, most of the short-term risks have been factored in. So, considering the impressive fourth-quarter GDP growth of 0.7% (second estimate) and higher BBA (British Banker’s Association) mortgage approvals of 44,700 in January, we can expect the Pound to reverse sharply in the near future.

The GBP/AUD pair has formed a near double bottom at 1.6030. The momentum is forming a positive divergence with the price. Thus, we can expect the pair to begin a firm uptrend.

A long position near 1.6080 can be taken by a currency trader to speculate on the forecasted upswing. Considering the political uncertainty in the UK, a stop loss order can be placed below 1.5960. An exit from the long position should be preferably made near 1.6310.

One of the best ways to trade the forecast in the binary market is by purchasing a call option, which expires on or around March 10 th . To boost the probability of success, the call option or its equivalent should be bought when the cross trades near 1.6080.

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