Pound and AUD divergence

While US dollar weakness was the dominant theme in the FX space, the strength in the sterling has maintained its momentum. 

The USD mostly lost ground to the majors, with some big moves in EUR/USD, GBP/USD and USD/JPY. This was mainly attributed to a sharp move in US yields which dropped around 10 basis points. It has been one-way traffic in the pound since the unemployment rate beat consensus on Wednesday.  The gains continued despite BoE Governor Mark Carney saying there’s no need for an immediate hike in borrowing costs. Cable is now trading at its highest since May 2011, with momentum firmly to the upside.

Some interesting dynamics are emerging in the GBP/AUD cross as the two currencies face increasingly diverging fundamentals. The pound is being underpinned by a vastly rebounding economy and the prospect of a rate hike in the not too distant future. Meanwhile the AUD is facing significant uncertainty and pressure from a domestic economy perspective and a recent bout of weakness from China. Yesterday’s disappointing HSBC China manufacturing PMI print kept commodity currencies like the AUD on the back foot and the trend has continued in today’s Asian trade.

GBP/AUD traded through 1.90 for the first time since September 2009 and this has many speculators talking about the prospect of a move to 2.00 in the near future. The pair printed a high of 1.9032 and continues to knock on 1.90 in Asian trade. The uptrend has been relentless and we’ve seen sizeable gains since the pair bottomed at 1.80 on January 14.

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