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Pound turns weak as BoE slashes FY17 GDP growth view

The positive sentiment created due to the announcement of snap elections in the UK enabled the Pound to forge great heights against other G10 currencies. Poor retail sales and employment data, on the other hand, kept the Australian dollar weak.

Ultimately, the economic data and political developments pushed the GBP/AUD pair to a high of 1.7640. However, the minutes of the monetary policy meeting issued by the Bank of England, and Australia’s budget, presented last week, indicate that the GBP/AUD pair would begin a downtrend, which may last several weeks.

The minutes of the BoE’s policy meeting released last Thursday showed expectations of lower than anticipated economic expansion in 2017. The central bank now anticipates UK’s GDP growth to be only 1.9%, against the prior forecast of 2%. The inflation outlook for 2017 was raised to 2.8%. Notably, BoE also expects the real income to decline considerably in 2017.

Al Jazeera English

The minutes of the meeting also revealed that only one member voted in favor of an interest hike. The market was expecting at least two votes in support of an increase in the benchmark interest rate.

Rain Newton-Smith, a chief economist at CBI, stated that the BoE is unlikely to make any change in its monetary policy, considering the recent mixed economic data reflecting poor wage growth and pressure on household spending.

The European investment and financial services institution also cautioned traders that the Sterling looks overpriced against the Euro dollar.

Luca Mezzomo, Chief Economist at Intesa Sanpaolo, said that the likely buildup of tension between the EU and UK, over the Brexit negotiation, will also weaken the Pound in the days ahead.

The Aussie, on the contrary, is strengthening due to a favorable Federal budget. A substantial infrastructure spending package, an increase in capital gains tax discount to 60% for investments in affordable housing, and levy on banks to fund welfare programs are seen positive for the Aussie. Thus, GBP/AUD pair is forecast to remain in a down trend in the nearby future.

Technically, several factors point to GBP/AUD pair’s decline. Firstly, the pair has broken the support level at 1.7530. Secondly, the MACD is making a bearish crossover below the zero line. Finally, the stochastic oscillator is in the bearish zone, thereby indicating a lack of momentum.

GBP/AUD Pair: May 15th 2017

GBP/AUD Pair: May 15th 2017

To benefit from the decline of the GBP/AUD pair, a short position can be created near 1.7440. The short position can be covered near 1.7180 where the next major support exists. To have a control over losses from an unexpected trend change, a stop loss order should be placed above 1.7560.

A forex trader can buy a put option to profit from the forecasted decline. The option should be valid for a period of one week and the contract should be acquired when the currency cross trades near 1.7440.


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