Pound remains bullish on strong manufacturing PMI data

The talk of hard-Brexit pushed the Pound lower against major currencies in mid-December. The FOMC’s statement pointing out a possibility of up to three rate hikes this year also aided the decline of the Pound.

Surprisingly, Australia’s third-quarter economic contraction of 0.5% y-o-y had only a minimal negative effect on its currency. The market largely discarded it as a one time event.

Anticipating a decline of the GBP/AUD pair, we had recommended investing in a put option contract on December 5th .

To currency traders, we had suggested going short at 1.7050, with a target price of 1.6800. Both trades ended in profit. We now expect the GBP/AUD pair to move up from the current level of 1.6900 due to the reasons mentioned below.

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The IHS Markit reported an increase in the UK’s manufacturing PMI (Purchase Manager’s Index) to 56.1 in December 2016, from an upwardly revised 53.6 in November. Analysts expected PMI reading of 53.3 in December. The overwhelmingly positive PMI reading reflects not only economic expansion but also optimism among manufacturers. Furthermore, the reading shows that the Brexit issue has least affected the businesses in the UK so far. The impressive consumer demand continues to keep the UK’s economy reasonably stronger than expected.

After hitting a two year high of $83.58 per ton, the price of iron ore had fallen to $77.25 on Wednesday. Analysts at RBC Capital Markets anticipate the price to decline further due to the prevailing excess supply in the market. The investment research firm has the distinction of being the most accurate forecaster of commodity prices in the final quarter of 2016. Australia is the world’s largest exporter of iron ore.

Similarly, the price of coking coal plunged to a low of $226 per ton, a level unseen since October 13th , in the final week of December 2016. The commodity hit a multi-year high of $308.80 per ton in November. However, it was unable to consolidate above $300.

Coking coal, which is used in steel mills, is the second largest export revenue earner for Australia. Thus, a decline in the price of iron ore and coking coal is expected to weaken the Aussie, against the Pound, in the days ahead.

Technically, proven support exists for the GBP/AUD pair at the level of 1.6860. The stochastic oscillator is also rising out of the bearish region. So, the probability of a short-term uptrend is high.

A currency trader can take a long position in the GBP/AUD pair at about 1.6910. To negate speculation related risk, a stop loss order can be placed below 1.6810. The profit can be taken at 1.7030.

A high or above contract should be picked up from a binary broker to benefit from the probable bullish reversal of the GBP/AUD pair. The contract can be bought when the GBP/AUD pair trades near 1.6910. The trader can choose a date around January 12th for the expiry of the contract.