GBP turns bullish as BoE signals end to rate cuts

The decline of the Euro, unresolved issues in the Euro zone and the Brexit referendum had a negative impact on the GBPAUD pair, which declined to a low of 1.86529 on Thursday. However, the Pound bounced back quickly to touch 1.89 levels. Market analysts believe that the sharp reversal will not fizzle out soon and the GBPAUD pair is poised for further rise because of the following reasons.

The Aussie fell against most of the major currencies in the last one year. The main reason was the decline in the price of crude oil, the economic slowdown in China and the sharp fall in the price of iron ore.

However, in the past eight months, the Australian dollar had a bull run against the Pound. It is mainly because of the issues surrounding the Pound rather than the strength of the Australian economy.

Barring Germany, the economies of all the Euro zone countries are not doing well. Even in the UK, the Office for Budget Responsibility (OBR) anticipates a GDP growth of only 2%, compared to the previous estimate of 2.4%. The Brexit referendum scheduled in June has also created a lot of economic uncertainty. However, it now looks as if the Pound is all set for a reversal.

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On Thursday, the Bank of England did not alter the interest rates. It was an expected move. What surprised the market is the Bank of England’s statement saying that interest rates would only probably rise in the future and not otherwise.

Furthermore, the crude price, having risen by about 45% in the past one month, is facing a major hurdle at 40-levels. Similarly, the price of iron ore fell sharply to about $38, after rising to $63 last week. The iron ore price continues to oscillate in a wide range. All these factors are expected to result in a temporary halt in the rise of the Aussie dollar against the Pound. Thus, fundamentally, a trader can expect the GBPAUD to rise in the weeks ahead.

Technically, the GBPAUD pair is in the oversold region. The main line of the MACD indicator has crossed above the signal line and is pointing upwards. This indicates that the uptrend is about to begin in the currency pair. The GBPAUD pair also has support at 1.8650.

The pair will have a difficult time crossing 1.9500 because of the major resistance in that region. Thus, a forex trader should take a long position in the GBPAUD pair near the 1.89 levels. To protect from huge losses, a stop loss order can be placed below 1.8650.

The long position can be diluted between 1.9450 and 1.9500. The risk to reward ratio for the trade is 1:2.5.

A forex trader should purchase a one touch call option with a target level of 1.92 or less. Considering the fact that GBP based currency pairs rise and fall very quickly, the expiry date should not go past the second week of April.