Chris Weston, Head of Research for Pepperstone offers his weekly analysis of what’s brewing in the Forex markets.
Looking at the calendar for the coming week, Aussie wages and employment, and UK CPI jump out as event key risks and potential price catalysts.
As it stands, the market feels on balance that we’ll get a 50bp hike from both the Bank of England and Reserve Bank of Australia at their respective September central bank meetings, with the Australian Central Bank expected to hike 150bp cumulative this year, and the Bank of England 120bp.
One way we can assess this is by relative expected interest rate differentials, or through short-term bond yield differentials. The 2-year maturity is a good place to start. We can see that the yield advantage to hold Aussie bonds over UK gilts (unhedged) is providing an element of support for the Australian Dollar. However, a simple overlap between the UK–Aus 2-year bond yield spread and GBPAUD has diverged and GBPAUD trades at a reasonable discount to where the spread resides.
A tactical view
Taking a tactical view, while we know the Australian labour market has been strong for some time, it feels as though the market will be far more shocked by a poor jobs number than a strong level of job creation. Aussie wages are naturally the backbone of inflationary pressures, so this data point counts, and we know the RBA forecast CPI inflation at 7.75% by Dec-22. So, big numbers here could put that forecast under review. Either way, it’s hard to see a world where we get more than 50bp in September from the RBA, but a big number, say 2.9% – 3%, and we’ll see hikes in 2023 lift sharply. Credit Suisse are the outlier call with a 3.2% estimate, which if comes to fruition will light up the AUD.
UK CPI could be quite influential. We know the Bank of England is forecasting inflation to breach 13%, so a number north of 10% here could get the GBP fired up. A number below 9.5% could bring out good GBP sellers. Granted inflation is still at very high levels, but we’re talking nuance, and GBP will fall on a decent miss.
What’s important here is the flow of capital and how traders see things here and now. We see in the daily chart that GBPAUD is breaking down through the 1.7830 to 1.7200 range. Is this significant? Is this the start of a more bearish trend and a new lower range?
It certainly feels like this could be the case.
Range breaks naturally get more meaning when the range is mature in duration, as is the case here. To me, this feels significant. Is 1.7000 by next Friday out of the question?
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