Currency Forecast - Sterling Vs. Aussie Dollar 10th February 2009
Sterling was well into recovery mode as January turned into February, rallying into the high 2.20s as bank stocks rebounded and the government stepped up plans for a special bank to buy toxic debt from the distressed sector. Last week the Bank of England cut interest rates again in a widely expected move, pushing the UK base rate down another 0.5% to a record low of 1.0%. Meanwhile, the Reserve Bank of Australia also cut rates last week, by 1% to 3.25%. Perversely, both currencies rallied as their respective central banks cut rates.
Usually a currency will weaken in response to monetary easing as investors look for higher returns elsewhere, but sentiment is now shifting, and traders are actually starting to believe that rate cuts will be passed on to the economy at last, and may actually help! So with the AUD cut being the larger, the Aussie dollar ended the week well into positive territory against sterling, and is now testing the technical support at 2.20.
Our feeling is that sterling has been rather oversold in recent months, and that most of the bad news is already factored in. There is a tentative uptrend forming on the chart, but a break below 2.0760 would undo the good work we've seen over the last three weeks. Clients should cover at least part of any AUD requirement now to reduce risk, or consider placing a stop order in the market to insure against renewed downside.
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