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Volatility hits the markets and Sterling as a new strain of the coronavirus is found, and with potential economic catalysts coming from both Australia and the U.K. ahead, this downtrend in GBP/AUD is one to watch.

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Fresh Market Headlines & Economic Data:

New COVID-19 strain inflicts market pain, triggers volatility

Oil Plunges With Virus Mutation Raising Lockdown Risks

‘Out of control’ Covid strain makes UK a global pariah as countries impose travel bans

Congress Reaches Deal on $900 Billion Pandemic Relief Plan

New home buyers in Canada saw pries rise 0.6% in November 2020

Ireland’s Coveney says Brexit breakthrough difficult in next 24 hours

Scotland’s Sturgeon calls for extension to Brexit transition period

UK Retail sales volumes stabilised in the year to December (balance of -3%, from -25%).

Australia sees higher iron ore earnings on China-fueled boom

New Zealand Credit spending in Nov. 2020: -5.6% y/y, 0.1% m/m

Japan’s Cabinet approves record ¥106.61 trillion budget for fiscal 2021

Suga draws line in the sand: Defend ‘100 yen’ dollar barrier

Upcoming Potential Catalysts on the Economic Calendar

Australia Retail Sales at 12:30 am GMT (Dec. 22)
German Consumer climate at 7:00 am GMT (Dec. 22)
UK GDP, Public Sector Net Borrowing at 7:00 am GMT (Dec. 22)
US GDP at 1:30 pm GMT (Dec. 22)

What to Watch: GBP/AUD

GBP/AUD 1-Hour Forex Chart
GBP/AUD 1-Hour Forex Chart

The Sterling was hit with a double whammy of a new strain of coronavirus found in the U.K. (leading to further lockdowns and travel bans from other countries) as well as continued Brexit concerns, pushing the pound lower against all of the major currencies to start the week. It was a rough -1.0% loss or more at the peak of the selling, but the pound has recovered since bottoming out during the morning London trading session.

Looking forward, it’s likely these developments are not going to fade away quickly putting us in a bearish bias on Sterling to start the week. But with Sterling currently bouncing at the moment, it makes sense to wait for the pullback to fully develop before considering a short-term short position.

We’re watching GBP/AUD to play those themes as the Aussie dollar may see a little bit of volatility soon with the latest retail sales data around the corner. Expectations are for further improvement from last month’s +1.4% m/m read, which could help give legs to the current downtrend in the pair.

So we’re watching GBP/AUD to complete its bounce, possibly around the previous area of interest around the 1.7700 handle. But if the pair finishes rallying at its current levels, even a short position from here (just above the 1.7600 handle) still makes sense given the daily ATR of around 165 pips and the next support level being around the 1.7400 handle. That makes a potential profit target reachable within a session or two if volatility stays bid.

Of course, the potential return-on-risk is more favorable if the pair continues to rally before reversing back lower, which also happens to raise the probability of success as well.

For the bulls, it’ll likely take positive Brexit developments and a weaker-than-expected Australian retail sales print to get traders short-term bullish on GBP/AUD, or possibly news that the current round of vaccines being distributed would likely be effective against the new strain.

If that scenario plays out, watch out for a break above the previous area of interest (around 1.7750) before considering a long position.