GBP vulnerable, AUD outperforms

Risk assets edged higher as the Bernanke effect rippled through markets. The fact that the Fed chief maintains and easing bias as reiterated to the Senate yesterday looks sufficient to provide a floor under risk assets over coming weeks. Sentiment was helped by a 6.9% jump in June US housing starts and positive earnings while the Fed’s Beige Book highlighted that growth was “modest to moderate’.

Q2 earnings have exceeded estimates for 72% of S&P 500 companies reporting so far providing a further element of support to risk assets. Hopes of further stimulus in China have also helped. Unfortunately all of this suggests that the market is looking for more artificial stimulus rather than underlying structural improvements. The efficacy of such stimulus is likely to more limited than in the past, suggesting plenty of scope for disappointment.

GBP took a hit on the chin yesterday as the Bank of England opened the door to a rate cut in the latest set of MPC minutes which were on balance seen as dovish. The currency will face another test today in the wake of the June retail sales report which could come in weaker than consensus.

Added to the fact that my quantitative models point to downside risks for GBP both against the USD and EUR the stars are aligning in the direction of growing GBP pressure over coming weeks. I look for GBP/USD to edge back town to technical support around 1.5518 while EUR/GBP is set to re test resistance around 0.7951 in the short term.

AUD’s outperformance continues unabated and the currency is set to make further strides in the days ahead. While AUD remains a relatively high beta currency, it is also a China play. In this respect it has benefited from expectations of more stimulus measures from China. Separately my risk barometer remains in ‘risk neutral’ territory, conducive for risk currencies.

While weak Aussie jobs data last week may have instigated a degree of caution into AUD bulls the currency is likely to continue to grind higher in the absence of a bout a rising risk aversion. Q2 inflation data next week will provide further direction but to be frank the market is already pricing in around 75bps of further policy rate cuts this year, and a benign inflation reading will do little to change this. The key resistance level on the top side for AUD/USD is 1.0475.

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