Pound turns weak on decline in manufacturing PMI

The eleven year low unemployment rate, one year high GDP growth of 2.3% in the third-quarter, and relative undervaluation in relationship with global bond yield differentials ensured a rally in the Pound against the Greenback and other rival currencies.

Surprisingly, the optimism enabled the Pound to gain against the seemingly invincible Australian dollar. Since November 10th , the GBP/AUD pair had gained more than 1000 pips to register a high of 1.7153. However, several crucial factors indicate that the Pound may not extend the rally until Christmas.

The analysts at ING believe that the Pound would start declining as the talks related to Brexit begin to intensify. Interestingly, a majority of the market participants believes that the recent rally in the Pound is a direct result of unwinding of large short positions. The analysts at Societe Generale also confirm this point of view. The IHS Markit survey indicated that the UK manufacturing sector is feeling the heat of weak exchange rates. The manufacturing PMI (Purchase Managers Index) reading declined to 53.4 in November, from 54.2 in October. The analysts were expecting a reading of 54.4.

S&P Global Platts

In Australia, the Bureau of Statistics reported a 0.5% m-o-m increase in the seasonally adjusted retail sales turnover in October. In the previous month, the retail sales turnover registered a 0.6% m-o-m increase. The reported growth was higher than the analysts’ expectation of 0.3% increase in the retail sales.

The sharp rise in the price of coking coal and iron ore is expected to contribute several billions of additional revenue to the Australian budget. The restocking of raw materials by the Chinese manufacturers is expected to keep the price of commodities bullish for many months to come. This will ultimately benefit the Australian dollar. Thus, based on the arguments provided above, we anticipate the GBP/AUD to remain bearish during the next few weeks.

The price chart indicates that the GBP/AUD pair is facing resistance at 1.7100 levels. The support for the currency pair exists at 1.6780. The MACD indicator reading is on the verge of turning negative. This indicates that the GBP/AUD pair is losing momentum and the correction will continue.

So, a short position in the GBP/AUD pair near 1.7050 levels looks to be the best way to earn profit from the asset pair’s movement. The stop loss order can be placed above 1.7150 to have a control over unexpected losses. The profit for the short position can be taken near 1.6800.

By investing in a low or below option (equivalent to put) offered by the forex brokers, a trader can hopefully realize returns of up to 70% in a span of one week. The investment should be made when the pair trades near 1.7050. The trader should choose a contract which remains valid for up to a week.

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