FX Outlook: Strong Pound and Weak Aussie?

GBP/AUD 4H Chart

Technical Analysis: Still Within the Accumulation Zone

From a 4-hour perspective, GBP/AUD is currently trading within the range of 1.9661 to 1.9472. It has faced selling pressure since yesterday’s European Session, triggered by the release of Australian GDP data, even though the figures exceeded expectations at +0.4% QoQ compared to the prior +0.3% and +0.2%. It’s worth noting that this positive news is somewhat offset by a decline in labor productivity during the quarter, which continues to weigh on the Australian Dollar (AUD). As of now, GBP/AUD remains within the accumulation zone, and if this zone holds, we anticipate an upward continuation.

Fundamental Analysis: RBA Pause and BoE Rate Hike

The Reserve Bank of Australia (RBA) has opted to maintain the cash rate at 4.1%, despite conveying a somewhat hawkish stance in its statement. The RBA acknowledges prevailing economic challenges and uncertainties, including below-trend growth and elevated concerns about China’s economic stability, which impact the AUD. Conversely, the Bank of England (BoE) is expected to raise rates by 25 basis points in its upcoming September meeting. There is currently a 76% probability of this rate hike, as the BoE has not observed a downturn in core inflation.

Insights Behind the Scenes: Unveiling Crucial Data for Traders:

Becoming a proficient trader requires more than just relying on technical and fundamental data; insight into real market dynamics is vital.

DXM: Decoding Retail Traders’ Sentiment

GBP/AUD Retail Traders’ current position

The DXM, or “Dump Money Index,” is a valuable tool for gauging retail traders’ sentiment. It quantifies the percentage of retail traders holding long or short positions in each market. Currently, a substantial 59% of retail traders hold short positions, indicating a contrarian signal that may offer potential advantages for those considering reverse trades.

It’s noteworthy that statistics show that 95% of retail traders sustain losses over extended periods, underscoring the value of contrarian strategies.

Seasonality in GBP and AUD Futures: Summer Trends

GBP Futures’ seasonality

Seasonality analysis predicts future price movements based on historical data. For GBP, seasonal analysis suggests the pair is likely to maintain a bull market until mid-September 2023.

AUD Futures’ seasonality

For AUD, seasonal analysis suggests the pair is likely to maintain a bear market until October 2023.

However, please note that seasonality doesn’t consider new developments or economic changes; it’s a pattern that can evolve and isn’t infallible.

COT Data: Hedge Funds & Leverage Funds Favor Pound Over Aussie

Big players’ GBPAUD position (Left is GBP, right is AUD)

The Commitment of Traders (COT) report, issued weekly by the Commodity Futures Trading Commission (CFTC), provides insights into positions held by large traders, such as hedge funds and investment banks.

Currently, hedge funds hold approximately 79.6k long positions in GBP, while AUD has around 52.3k long positions. While both data sets show a bullish bias for both Pound and Aussie, it’s crucial to consider the broader context to determine which currency is stronger based on current fundamentals.

Summary: All Signs Point to a Long GBP/AUD Position

  • Technical Analysis: GBP/AUD is in an accumulation phase.
  • Fundamental Analysis: Weak economic outlook for Australia but the potential for a BoE rate hike.
  • DXM: Most retail traders hold long positions in the AUD.
  • Seasonality Analysis: Seasonal patterns suggest continued GBP bullishness and AUD bearishness until October 2023.
  • COT Data: COT data indicates that big players favor the Pound over the Aussie.

Trade Recommendation: Long GBP/AUD Position

Entry: current market price, or any prices as long as it within the accumulation zone

Take-Profit: 1.99618

Stop-Loss: 1.92934

Risk-to-Rewards: 1:2

Important noted:

  1. If the price drops below the bottom of the accumulation zone, consider another entry.
  2. If the price breaks above the top of the accumulation zone, consider another buy limit.
  3. In this case, it is recommended to divide your 1% risk into 3 positions, roughly 0.33 lot for each position. Alternatively, you can risk 1% with only one position.

Author: Jacky.T

Sources: PMT

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