Pound-Australian Dollar Exchange Rate Soars Back Above 1.90

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- Australian Dollar gives back recent gains

- Chatter of interest rate cut at RBA weighs

- Broad-based rally in Sterling solidifies floor under GBP/AUD

The Pound-to-Australian Dollar exchange rate jumped an impressive 0.80% to reach 1.8984 at the start of the new week, with further gains being made in the Tuesday session that take the GBP/AUD rate back above 1.90 to 1.9019 at the time of publication.

The advance comes in sympathy with a broad-based rally by the Pound and talk of a potential interest rate cut being delivered by the Reserve Bank of Australia (RBA) as early as February.

The AUD/USD exchange rate meanwhile fell 0.50% over Monday and Tuesday to trade at 0.6918.

Aussie Dollar weakness was widespread owing to growing expectations for an interest rate cut at the RBA in February: the rule of thumb in currency markets is that a currency will decline when its issuing central bank embarks on an interest rate cutting cycle.

Talk of a potential February 04 interest rate cut makes for a sharp shift in expectations as markets had only been pricing any additional rate cuts to be delivered well into 2020. The bringing forward of this rate cut would therefore understandably introduce some weakness in the Aussie currency.

"The Australian Dollar is having a tough time," says Erik Bregar, Head of FX Strategy at Exchange Bank of Canada. "Unlike the Euro and the Pound, it cannot cling to some positive data points for today and so we think the market is following the broader risk tone, which started off the week quiet negatively."

"We’re also hearing chatter that the Reserve Bank of Australia may use the worsening Australian wildfire situation as a reason to cut interest rates again on February 4th," adds Bregar.

The number of homes lost since the fires began in September is now approaching 2,000 and more than 25 people are dead or missing. The fires have burnt out almost 15 million acres, about a quarter of the size of the UK, and are forecast to continue for weeks.

"The Australian bush fires are going to impact Australian growth and the RBA will step in with a rate cut in February," says John J Hardy, Head of FX Strategy at Saxo Bank.

Above: GBP/AUD price action since August has tended to reflect appreciation in value of Sterling. * Time to move your money? | Get industry-leading exchange rates and maximise your currency transfer potential with Global Reach. Speaking to a currency specialist will also help you to capitalise on positive market shifts while protecting against risk. Find out more here. * Advertisement

Sterling Powers the GBP/AUD Rate Higher

A weaker Aussie Dollar may have provided some support to GBP/AUD, but it is a broad-based recovery in Sterling that is responsible for the lion's share of gains.

The British Pound starts the first full business week of 2020 on a strong footing, recording advances against the majority of the world's major currencies.

The rally comes following a better-than-expected economic data release that suggests the UK economy could pick up some momentum in the early stages of 2020. The Services PMI - which gives a snapshot of activity in the UK's dominant services sector - read at 50, which is better than the 49.1 markets were expecting.

Analysts at Danske Bank say the data is still weak, "but future business expectations have risen on the back of PM Johnson's big election victory."

Danske Bank note the Pound moved higher on the back of the release.

"Business optimism recovered to its highest level since September, and firms returned to increasing their staffing levels, with the employment index rising to 51.1, from 50.1. Crucially, the vast majority—about 85%—of responses to Markit’s survey were received before the general election on December 12, implying that firms that submitted results too late for the flash reading were much more upbeat than the rest," says Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics.

The Pound's recovery is particularly impressive given the strength of the Australian Dollar of late: the currency was one of the best performing major currencies of the past month, with a sizeable 1.53% advance being recorded against the Pound.

The Pound rallied to a multi-month high at 1.9523 in December as markets raced to price in a decisive win for Prime Minister Boris Johnson's Conservative Party, however the gains soon unravelled amidst a combination of profit taking and fears that the UK and EU would be unable to reach a trade agreement by the end of 2020.

The decline was rapid, and saw the GBP/AUD exchange rate reverse back to a low of 1.8653, which was reached on December 23.

However the exchange rate has since steadily recovered from its December low, and is quoted at 1.9019 at the time of writing, suggesting a temporary floor in the exchange rate might have been established.

The Australian Dollar has gained in value across the board over recent weeks, ending 2019 on a strong note thanks to the notable progress made between the U.S. and China towards establishing a new trade deal.

Above: The Aussie recorded strong gains against the world's four largest currencies over the course of the past month.

"Going forward its seems to reasonable to assume that the AUD will remain sensitive to the global growth outlook with a particular focus on the outlook for China," says Jane Foley, a Senior FX Strategist with Rabobank in London.

If the Aussie Dollar's good run - built on the back of progress between China and the U.S. - can extend, then there is a heightened prospect of the Australian Dollar pushing the GBP/AUD exchange rate lower once more.

Indeed, the Pound-to-Australian-Dollar exchange rate has been tipped as a sell by strategists at Nordea Markets, who say the British currency is likely to be an underperformer in a market where precious metals prices are rising and that the Aussie unit should be an outperformer.

"If commodity prices rebound on a slightly more broad-based basis, then you better buy a truckload of AUD versus GBP before it happens. USD is historically the worst currency to own if Gold rallies (that is by the way NOT the case currently), but GBP is the second worst," says Andreas Steno Larsen, a strategist at Nordea Markets. "AUD is on the other hand high beta to commodity price increases, no matter whether its gold, copper or something third. We consequently like the short GBP/AUD bet."

Gold prices were up 4% for 2020 on Monday and the silver price had risen 3.7% in response to safe-haven demand prompted by the U.S. killing of Iranian General Qassam Soleimani in an airstrike last week, which has drawn threats of retaliation from Tehran and its proxies and sent investors scurrying for cover.

"The combo of renewed geopolitical tensions, a rising oil-price and signs of decent late-cyclical inflation pressures has allowed Gold and Silver to rise despite generally higher interest rates," says Larsen. "A slightly weaker USD could prove to be the final nail in the coffin for the 1550 resistance level in Gold."

Nordea Markets is not convinced of "the world is healing narrative" but still see the Australian currency eventually getting the better of its British rival if the gold price continues to rise.

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