- GBP/AUD attempting recovery but upside potential limited
- Could struggle at top of a possible 1.7557 to 1.7876 range
- China concerns weigh on AUD/USD & support GBP/AUD
- But divergent RBA, BoE policy a constraint for GBP/AUD
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The Pound to Australian Dollar exchange rate entered the new week on its front foot as Sterling staged a partial recovery from earlier losses and its antipodean counterpart came under pressure alongside the Renminbi amid mounting market concerns about the Chinese economic outlook.
Australia’s Dollar remained on its back foot while near to two-year lows against the U.S. Dollar early in the new week as other currencies and international markets responded to further weakness in the Renminbi, which fell to its lowest since November 2020 on Monday.
Related Monday losses for AUD/USD helped lift GBP/AUD further from some of its lowest levels since the closing months of 2018 that were reached in the wake of last Thursday’s Bank of England (BoE) monetary policy decision.
“Sentiment in Asia deteriorated on news of further Covid curbs in both Shanghai and Beijing and G-7’s announcing its determination to end reliance on Russian energy,” says Tim Riddell, a London-based macro strategist at Westpac.
“CNY also weakened through 6.7200 (-0.8%) with CNH slipping to test 6.77 against the firm USD,” Riddell and colleagues said on Monday.
China’s Premier Li Keqiang said at the weekend that authorities will need to step-up efforts to save jobs and support households as they grapple with the fallout from fresh coronavirus containment measures that are disrupting activity in major metropolitan hubs including Shanghai and Beijing.
Above: GBP/AUD at daily intervals with Fibonacci retracements of January decline and selected moving-averages indicating possible areas of short-term technical resistance for Sterling and support for the Aussie. Click image for closer inspection.
This was a clear indication that the already slowing domestic Chinese economy is faltering further in what is an outright risk for the Renminbi and a likely headwind for correlated currencies such as the Aussie Dollar and Sterling, albeit one that has positive implications for the GBP/AUD pair.
“The broad risk-off move, taking iron ore futures lower, has resulted in AUD/USD trading below 0.70 for the first time since last January,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets.
“Although we have flirted with the 0.70 threshold, the year-to-date low at 0.6968 has yet to be tested. For now, ongoing Chinese macro worries, resulting in USD/CNH continuing to grind higher, are dragging on the broad AUD,” Stretch and colleagues also said in a Monday market commentary
While pressure on the Renminbi is a headwind for the Aussie and a supportive factor for the Pound to Australian Dollar rate, the latter would likely struggle to extend Monday’s rebound by much above the 1.78 handle and in part due to the weakened state of Sterling.
“GBP/USD and EUR/USD face more downside because of increased risk that the UK and Eurozone economies are moving in the direction of stagflation,” says Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.
Above: AUD/USD at weekly intervals with Fibonacci retracements of 2020 uptrend and extensions thereof indicating prospective areas of short and medium-term technical support for the Aussie. Shown alongside GBP/USD and Renminbi-Dollar rates. Click image for closer inspection.
“Higher real [U.S.] Treasury yields and growing concerns over a sharper slowdown in Chinese economic activity can lead AUD/USD to sustain a break under key support at 0.7000,” Haddad also said on Monday.
With the main Sterling pair GBP/USD under pressure since last Thursday’s BoE decision, there are limits to the extent that GBP/AUD can rise in the absence of a significant escalation of losses in AUD/USD, which might be unlikely in light of the evolving Reserve Bank of Australia (RBA) policy stance.
The RBA lifted its cash rate for the first time since long before the coronavirus crisis last week, taking it up to 0.35%, and signalled that it will likely raise the benchmark further in the months ahead after inflation surprised significantly on the upside of expectations last quarter.
“Our RBA profile has 25bp moves from here, with a 40–50bp move in June a very close call depending on the upcoming wages data. We have the cash rate at 2.35% by mid 2023, which is well below the market,” says David Plank, head of Australian economics at ANZ.
“Eventually we see the RBA taking the cash rate into restrictive territory of 3% or more as it seeks to combat persistent inflation pressure. This implies a sharper slowdown in the economy in 2025 or later,” Plank and colleagues said last week.
Source: Reserve Bank of Australia.
Few analysts expect the Australian Dollar to benefit much from the forthcoming uplift in the RBA’s interest rate given that financial markets have been pricing-in this shift for some time now, although the forecasts released by the RBA last Friday highlight that there are still upside risks for both.
This is in part because Friday’s forecasts suggested that Australian CPI inflation is likely to remain close to the top of the RBA’s two-to-three percent target range at the other end of its forecast horizon and even after assuming that the bank meets lofty market expectations for its cash rate.
Financial markets have priced-in an increase in the cash rate from 0.35% to 3.65% by the middle of 2023 but could potentially be led to anticipate a faster increase to those levels if Australian wage and inflation figures surprise on the upside of the RBA’s expectations.
This would in turn support the Australian Dollar while imposing a constraint on GBP/AUD, and especially in light of the more cautious approach recently adopted by the Bank of England (BoE).
The BoE has raised Bank Rate four times since December, taking it up to a post-2008 high of 1% last week, but suggested strongly with May's economic forecasts that it might be unlikely to meet market expectations for the benchmark to rise further and as far as 2.5% by the middle of 2023.
Above: GBP/AUD at weekly intervals with Fibonacci retracements of 2017 uptrend indicating possible areas of medium and long-term technical support for Sterling Click image for closer inspection.