My Favorite Forex Trade: GBP/AUD

My favorite long term forex trade is short GBP/AUD. From both a technical and fundamental basis, the currency should be headed lower.

Based upon the recent trend of economic data including the highest level of unemployment in 12 years and the sharpest decline in retail sales since Feb 2009, the Bank of England should keep monetary policy easy for as long as possible. According to comments this morning, they seem to agree. BoE officials said their decision to leave their Quantitative Easing program unchanged was a close one - in fact some members actually favored increasing the program. Of all the major central banks, the BoE is the only one still considering more rather than less monetary stimulus and for that reason, the GBP should be headed lower. In fact, I think that the GBP will probably be the worst performing currency this quarter.

In contrast, the Reserve Bank of Australia intends to raise interest rates again in the near future. Last night’s comments from RBA Governor Battelino could not be more hawkish. He said the mining boom that is currently underway could last beyond 2020 and the boom is expected to lift investment and terms of trade more than in the past. He also believes that the growth potential of China and India suggests that the demand boom will also last longer. Therefore monetary policy needs to be extremely disciplined at this time because every past mining boom has fueled inflation. As a result, the rise in the Australian dollar is important because it helps to contain inflation. In other words, not only will the RBA raise interest rates again but they also want the Aussie to rise.

On a technical basis, moving averages are in perfect order meaning that the 10-day SMA is below the 20 which is below the 50 and 100. This usually foreshadows a new and major trend in a currency. On a shorter term basis, the GBPUSD is also trading deep within the Sell Zone territory according to my Bollinger Bands - all of which points to further losses:

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