Over the past few trading weeks the British Pound has rallied and so has the Australian Dollar. The GBPUSD and the GBPJPY have seen very strong advances and so has the AUDNZD. Forex traders can look at fundamental factors which partially explain the price movements, but once taken a closer look one can spot a divergence between the reported data and the corresponding moves in the price of those currencies.
This opens up great trading opportunities as a sharp rally in a currency which goes counter fundamental data will often be reversed especially once technical aspects confirm a trend reversal is on the horizon. Many forex traders like to follow the trend which can yield positive results as long as the trend remains intact, but simply buying a currency pair because it is moving higher or selling a currency pair because it is moving lower is not a recommended trading strategy.
What happened fundamentally with the British Pound? Forex traders who look at fundamentals will argue for a lower British Pound as economic data has been weaker than expected. For example the Markit/CIPS Construction PMI fell to 54.2 in April from 57.8 in March and BRC like-for-like sales dropped 2.4%, but the results of the UK general election were positive and the Bank of England may decide to alter their monetary policy. The British Pound rallied on mixed data, but treated it as exceptionally well data. This created a divergence.
What happened fundamentally with the Australian Dollar? The RBA cut interest rates down to 2.00% and other economic data points towards a stalemate in the economy at best while China continues to slow down. All those factors support a much weaker Australian Dollar, but the Aussie has rallied sharply especially against the New Zealand Dollar. This has created another divergence as fundamentally the Australian Dollar should get weaker and not stronger.
What about the GBPAUD? This currency pair puts two rallying currencies against one another and both currencies show a divergence between the fundamental picture and the technical picture. The British Pound had the upper hand and the GBPAUD rallied, but is now extreme overbought which could lead to a trend reversal as many factors point towards a weaker level in the weeks ahead. The GBPAUD is filled with divergences and in the end it could come down to which ones are present at a greater level.