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Australian Dollar to Return to Bottom of Range against Pound: Rabobank

AUD outlook

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The Pound and Australian Dollar are duelling within the confines of an increasingly well defined range, but it is the Pound that could be about to push a breakout higher.

However, currency strategist Jane Foley at Rabobank says the Pound will ultimately fail to sustain a move higher and will return back to the bottom of its range.

The Pound to Australian Dollar exchange rate (GBP/AUD) has been respecting a range that lies approximately between 1.78 at the top and 1.72 at the bottom since March 18, when the FX shock of Russia's invasion of Ukraine started to stabilise.

This range is captured by the below snapshot of the pair's daily chart:


GBP/AUD daily chart


 

The chart tells us the pair has become increasingly comfortable holding ground in this area and will require a strong external or idiosyncratic impulse to break.

For now the exchange rate is testing the topside as the Pound's rally in the wake of June's Bank of England update extends.

But Foley is looking for this assault of the top of the range to ultimately fail and a return lower to ensue.

"We would prefer to buy AUD vs. GBP," says Foley in a recent note detailing why she is bullish the Aussie.



She says she expects a stronger Australian Dollar on a 12-month view based on Australia’s relatively sound economic outlook.

This strength comes in part thanks to the country's ongoing terms of trade advantage as elevated export prices ensure the country's foreign exchange receipts remain robust.

Latest data show the seasonally adjusted balance on goods and services surplus increased $757m to $10,495m in April.

Rabobank also notes the Reserve Bank of Australia's (RBA) ongoing guidance that further interest rate hikes are likely over coming months, citing Governor Philip Lowe who this week warned that Australians should be prepared for more interest rate increases.

But Lowe also said the path of these hikes will be guided by incoming data.

He added the economy will remain supported thanks to the A$200BN in accumulated pandemic savings that households can still fall back on.

Rabobank expects the Australian Dollar to hold close to current levels against the U.S. Dollar on a one-month view and rise moderately to the 0.73 area by year end.

But it is against the Pound where she sees the easiest Aussie gains coming.

"We would prefer to buy AUD vs. GBP and see scope for another move to the GBP/AUD1.73 area," says Foley. (Set your FX rate alert here).

However, she acknowledges there are risks to the pro-AUD thesis that, if realised, could in fact mean GBP/AUD breaks higher towards 1.80 again.

She notes higher interest rates in Australia are already having an impact on house prices in Australia with CoreLogic reporting Sydney house prices have dropped 1.5% from their January highs.

In addition, "the sharp drop in iron ore prices this month highlight’s Australia’s potential sensitivity to China’s housing market fears and to its broader economic outlook."

"The AUD is likely to be sensitive to risks regarding Chinese economic output and to broader concerns regarding slowing global growth," she adds.