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British Pound Cross Pick 05.15.2012

British Pound Cross Pick 05.15.2012

David Song, Strategist

The short AUDNZD from 1.2814 got stopped out as the pair broke out of the narrow range, but I am still looking for another opportunity to sell the pair as the Reserve Bank of Australia keeps the door open to lower the benchmark interest rate further. As the relative strength index approaches overbought territory, the correction in the AUDNZD should taper off in the coming days, and we will keep a close eye on the 1.2900 figure for a potential entry. At the same time, I am looking to buy the GBPUSD as it comes up against former resistance around 1.6000, and we should see the sterling retrace the decline from the beginning of the month as it maintains the upward trend from earlier this year. As the U.K. faces a double-dip recession, there’s speculation that the Bank of England will curb its growth forecast and leave the door open to expand its balance sheet further, but the central bank may sound a bit more hawkish this time around amid the stickiness in underlying inflation. As the BoE quarterly inflation report comes into the spotlight, we anticipate to see a bullish reaction following a less dovish statement, and we may see the group shift gears and move away from its easing cycle as its credibility for price stability remains under scrutiny. In turn, I will try to buy as close to 1.6000, with a stop at 1.5968, the 50-Day SMA, but will keep an open target for now as I expect to see fresh 2012 highs in the exchange rate.

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