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A tale of two cuts

Both the Reserve Bank of Australia and the Bank of England cut rates this week. However, there is a clear difference in the performance of the respective currencies. Sterling’s move was a text book response, but the Aussie confounded expectations by rising. Naturally, this has traders watching GBP/AUD closely.

The RBA cut rates on Tuesday from 1.75% to 1.50%. The AUD fell against the USD by about 40 points, before rallying back in the next few hours to finish the session ABOVE the point at which the announcement occurred. Many point to the more stable commodity environment as a driver of this strength, with a particular focus on resurgent iron ore prices. The AUD moved higher in Asia Pacific trading on Friday, despite an RBA statement on monetary policy that displays an easing bias.

In contrast, when the BoE cut on Thursday GBP dropped more than two big figures against the USD, and stayed down. Although the cut was from 0.5% to 0.25%, its effectiveness may relate to the fact it is the first cut from the BoE in more than seven years.

Whatever the causes, the price action points to strength in AUD and weakness in GBP, which could see further falls in GBP/AUD over the coming sessions.

The chart points to a K.I.S.S. trade in the pair. The 1.7250 level is a low from 2014. After July’s false break, GBP/AUD is now testing the level again. Selling at 1.7030, with a stop loss at 1.7085, the target is 1.6675, just above the October 2013 support at 1.6650.

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