We’re setting up for a fall in the GBPAUD as the Australian central bank has been slow to react to rising inflation and the Bank of England although early to the rate hike cycle, is not seeing much improvement in the UK economy and may be preparing to slow down their rate hike cycle. If we get a push into resistance after either of these rate decisions, I will be looking to fade the rips.
Forex Analysis - GBPAUD
While it is a bank holiday here in the UK, the forex markets are still active, and the pound is showing relative strength against most of its peers. The forex heatmap indicates the commodity pairs are doing worse against the safe-haven currencies in the London session, so we begin the new month with a risk-off mood. The focus of this week is on central bank monetary policy, which starts with the RBA on Tuesday morning. The Australian economy has been doing well, and inflation is increasing as it has in other developed countries. Due to Australia's export-oriented economy, which deals mostly in commodities, higher inflation has some benefits for them. The only thing they need now is for China to end its lockdown and start importing more goods and services from Australia.
During the height of the COVID pandemic, the RBA lowered interest rates and is expected to reverse that decision this week. As we've seen with other central banks, we should begin with a modest 15bps rate hike. If they give forward guidance that they plan to ramp up their rate hike cycle, then we should expect the Australian dollar to remain strong from Tuesday, potentially accelerating against the British pound if the Bank of England announces a dovish rate hike on Thursday. The Bank of England could indicate that there will be no further hikes due to growing economic worries into the back end of 2022.
Price action cut through the demand zone forming at the beginning of 2021 on the weekly chart of GBPAUD. Having removed that demand, the price is now looking for a new cohort to sell to, so we're seeing the price climb back toward the former market structure around 1.8120 and possibly the weekly 200-period moving average.
Observing a daily chart of the GBPAUD, the move lower through the swing low of 2021 began around 1.9000, but we had a supply zone form between 1.8000 and 1.8200, so I expect that area to hold, and that the downtrend will continue from that acting as resistance. My base-case scenario is that the RBA comes out hawkish but also that the news on Thursday drives price into that area of supply, trapping traders long, only for the price to reverse and come lower.
The ActivTrades sentiment indicator has proven to be a great contrarian indicator in the past, so I am looking for resistance to be found, for the price to come lower and for the cohort who are long the GBPAUD to get stopped out at some point following the two bank rate decisions.