Outlook for the Aus Dollar vs Pound Sterling Exchange Rate: Outlook pus 1.992 in rech for GBP/AUD

By Gary Howes

The outlook for the Australian dollar (AUD) remains poor with two days of heavy losses continuing to take a heavy toll on the currency's technical guidance.

A look at the latest Australian dollar exchange rates shows:

• The pound sterling to Australian dollar exchange rate is 0.93 pct higher at 1.8902.
• The euro to Australian dollar exchange rate is 1.03 pct higher at 1.5178.
• The Australian dollar to US dollar exchange rate is 0.82 pct lower at 0.8779.

Note: Our AUD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

Hurting the AUS dollar today was China’s HSBC/Markit flash PMI eased to 49.6 in January, below December’s 50.5 reading and consensus calls for a modest fall to 50.3.

The Aus dollar continues to be tethered to the ups and downs of the Chinese economy, and with analysts predicting a continual slowdown in that country's growth path, we could see the outlook for the Aus dollar hampered.

"It was the first time that PMI dipped below the boom/bust 50 level since July of last year indicating that economic conditions in China are starting to slow materially. The Aussie reacted immediately to the news dropping to a low 8777 as traders feared further slowdown in Australian economy from waning demand out of China," notes Boris Schlossberg at BK Asset Management.

According to Schlossberg, the RBA now finds itself in the most uncomfortable of policy choices.

"The central bank would like to see Aussie weaken further towards the 8500 level to rebalance the country's terms of trade and make exports more competitive, but it must now face the prospect of inflationary pressures as rise in import costs and government spending have pushed the CPI well above expectations," says the analyst.

Given the central bank's dovish bias the Australian monetary authorities may ignore the bump in the CPI measures and continue to consider possible rate cuts as the year proceeds.

AUD/USD meanwhile remains mired near its yearly lows and may test the key 0.8750 support before the week ends.

As a result of this broad-based AUD weakness, analyst Sasha Nugent at Caxton FX is forecasting a higher pound sterling vs Aus dollar exchange rate:

"We expect Aussie weakness to keep sterling on the front foot and with levels currently at 1.8892, trading above 1.9920 is within reach."

British pound (GBP) powers ahead

The outlook for the GBP/AUD remains firmly in positive territory.

"The British pound traded sharply higher against all of the major currencies today, hitting fresh 1 year highs against the euro and Swiss Franc on the back of stronger U.K. employment numbers.  As we surmised from the PMI reports, the U.K. labor market improved significantly in the month of December, easing concerns that the economy peaked towards the end of the year," says Kathy Lien at BK Asset Management.

Jobless claims dropped by 24k which was less than economists expected but the unemployment rate plunged to 7.1%, just a hair above the Bank of England's 7% threshold.  

At the last central bank meeting, policymakers stressed that 7% is a threshold and not trigger for a rate hike.

According to the minutes released today, members "saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future.

Moreover, it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained.