It’s probably fair to say that the British pound exceeded expectations of many in 2017. By the close of the year, GBP had rallied 9.53% against the flailing greenback, 7.4% against NZD and 5.6% against JPY. Yet, whilst these are admirable results from a currency which was poised to only go lower (thanks to Brexit), we have now witnessed a momentum shift against commodity currencies since the beginning of December.
A few things occurred around this time which favoured commodity currencies: CAD was supported by the Bank of Canada hike and strong hint that less stimulus may be required (firmer PMI’s and housing builds also did their bit, of course); AUD was bolstered by a stellar employment data; NZD experienced short covering as the ‘market friendly’ Adrian Orr was named as the next RBNZ governor. Moreover, all three currencies were supported by higher commodity prices and a weaker greenback.
Unfortunately for sterling, traders are finding less reason to support GBP without a fresh catalyst, although it held up well against the greenback over the same time period. As GBP has depreciated the most against AUD relative to CAD and NZD since the beginning of December, we’re on the lookout for a short opportunity on GBP/AUD. That is not to say opportunities may not present themselves on GBP/NZD or GBP/CAD, though, but relative strength currently favours short potential with GBP/AUD.
Looking at the daily chart of GBP/AUD, we can see it was Dec. 8 when the 2017 high formed at 1.7997. This was its last hurrah of the year as a momentum shift took place and losses began to unfold. Over the subsequent 13 sessions, only two minor up-days were seen as part of a shallow pullback, which merely served as a minor pause prior to breaking the August trendline. By the end of the mini-rout on day 13, GBP/AUD had shed -4.4% and support was found at 1.7211. Will this level continue to hold as support? Recent price action begs to differ.
Following a relatively small pullback to 1.7416, yesterday’s bearish engulfing candle suggests a swing high may have formed, or at the very least is making an attempt of one. What makes this candle of particular interest is how the session opened just beneath a resistance zone and an attempted rally above it failed to hold, before rolling over as a mini bull-trap. That it also closed at the low of the session and its range was outside the prior days’ also further highlights the bearishness of this particular session.
So our attention now shifts to 1.7211, as a break beneath the December low opens up a potential run for 1.6896-928. This is also where patience becomes a virtue. As the bearish engulfing candle was the widest ranging day in 7 session, there is the risk that the subsequent candle may not be as volatile, or even retrace following a break lower. So perhaps a preferable outcome is for prices to stabilize above 1.7211 before providing a decisive break lower, where we’ll then seek a trade entrance in the form of price compression or low volatility retracement.