Weak inflation data turns Pound bearish

The less than hawkish stance taken by the Reserve Bank of Australia in the May monetary policy meeting, weak GDP growth, and decline in the commodity prices kept the Australian dollar weak against the Pound in June.

On the contrary, the record low unemployment rate assisted a rally in the Pound. However, the GBP/AUD pair has declined considerably in the past few trading sessions.

While the widened trade deficit is one of the main reasons for the Pound to weaken, there are several other factors which support a further decline of the GBP/AUD pair.

On Tuesday, the Office for National Statistics reported a 2.6% y-o-y increase in the consumer price inflation in June, compared with a four-year high of 2.9% increase in May, and lower than economists forecast of 2.9%. The UK retail price index also recorded a slower than anticipated increase of 3.5% y-o-y in June, versus market’s expectations of 3.6%, and below the previous month increase of 3.7%.

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The slowdown in inflation and retail price index has considerably reduced the possibility of a rate hike in August. The odds of a rate hike this year has gone down below 50%. Commenting on the unexpected slowdown in inflation, G-10 strategist at Standard Bank stated that the CPI data has further cemented his bearish view of the Pound.

The minutes of the July 4 monetary policy meeting of the RBA were released on Tuesday. It revealed that the members of the policy setting committee were more optimistic about the economy than the market had earlier assumed. The July minutes were contrasting when compared with the official statement released at the end of policy meeting. The RBA officials had discussed about improving labor market, rise in household consumption, increase in public investment and overall growth in the global economy. In particular, the RBA members had exchanged ideas and estimated that a neutral interest rate would be 3.5%, which is well above the current 1.5% level. The July minutes does not hint about a rate hike. However, it certainly shows that the current level is very much accommodative and there is no possibility of further rate cut. The minutes of the meeting have caught the market off-guard. The weak economic data and surprisingly positive RBA minutes is expected to keep the GBP/AUD pair in a bearish orbit.

Technically, the GBP/AUD pair has broken the support at 1.6750. The MACD indicator is moving deeper into the negative territory. The bearishness in the GBP/AUD pair is also indicated by the sub-50 reading of the RSI indicator. Thus, we can expect the decline to continue.

By opening a short position in the Forex market, we wish to gain from the probable decline of the GBP/AUD pair. The preferred entry and exit levels are 1.6430 and 1.6180. A stop loss order would be placed above 1.6530 to minimize the volatility risk. If there is a possibility, we would also invest in a put option offered by a dependable binary broker. We would target a strike price of 1.6430 and contract expiry date around July 28th .

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