Pound-Australian Dollar Rate Recovers Footing after RBA Acknowledges Aussie Strength

- GBP steadying at bottom of short-term range following RBA comments.
- RBA reveal optimism on economy and concerns about strength of AUD.
- AUD/USD corrects as GBP/USD & GBP/AUD aided by Brexit optimism.
- GBP/AUD in long-term breakdown but currently holds 1.82-to-1.90 range.

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The Pound-to-Australian Dollar exchange rate was edging higher on Tuesday as Sterling benefited from an optimistic mood in London while the antipodean unit continued its correction lower from 2020 highs, aided by acknowledgement of its recent strength from the Reserve Bank of Australia (RBA). 

Pound Sterling higher against commodity currencies including the Aussie on Tuesday and only fraction lower against lower-yielding safe-havens after Prime Minister Boris Johnson's bullish claim that a Brexit trade deal could be done before Autumn aided boosted sentiment toward the British currency. 

Meanwhile, the Australian Dollar was lower across the board almost after minutes of the latest RBA meeting cast policymakers in an optimistic light when it comes to the economic recovery out of the coronavirus trough, but also revealed the first signs of concern about strength in Aussie exchange rates. 

"The June minutes made an observation about AUD's strength ("appreciated further relative to the US dollar and on a trade-weighted basis, to be around levels previously recorded in January"). The minutes acknowledged the sharp contraction in activity and hit to the labour market underway, but consistent with other recent communication, also suggested that the worst is probably behind us," says Daria Parkhomenko, a strategist at RBC Capital Markets. 

Above: Pound-to-Australian Dollar rate at daily intervals with Fibonacci retracements of April fall, selected moving-averages. 

Australia's Dollar has risen against every major currency except its Kiwi rival in the last month and had risen more than 10% against the U.S. Dollar between May 18 and its peak on 10 June while gaining nearly 4% over Sterling since late May. However, the Pound-to-Australian Dollar rate has fallen -14% from its 2020 peak at the beginning of April having fallen from 2.06 in that time. 

Investors have been quick to bid the Aussie higher after Australia was first in line to all but vanquish the coronavirus and begin reopening its economy, limiting the immediate fallout. However, the global recovery from the coronavirus shutdown also marks the beginning of a new business cycle that would always favour commodity currencies like the Aussie over the likes of Pound Sterling, which has been an additional motivation of demand for the Kiwi. 

But the RBA's acknowledgement of this strength could be indicative of it becoming a problem for policymakers, which might limit appetite for the Aussie in the short-term and potentially further encourage the correction that was already dragging AUD/USD lower before the minutes were released. That would mean a higher Pound-to-Australian Dollar rate if GBP/USD remains on its front foot as it was early on Tuesday. The latter is far from certain, however. 

Above: AUD/USd rate shown at daily with Fibonacci retracements of March recovery and selected moving-averages. 

"AUD/USD has eased back to initial support offered by the.6774 the 5 th February high and is seeing a rebound from here. It is possible that this is all the correction we will see, but we suspect that it will struggle to again overcome the 7031/62 resistance. Below 0.6774 lies the 200 day ma at 0.6666. Key support is offered by the 2 month uptrend at 0.6583 and this maintains an upside bias," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

An AUD/USD fall back to 0.67 would leave it near the 200-day moving average referenced by Jones as well as perched on top of the 23.6% Fibonacci retracement of the March recovery trend, and would be enough to lift the Pound-to-Australian Dollar rate back to 1.8940 provided GBP/USD continued its climb back toward its own 200-day moving-average near 1.2690.

But much GBP/AUD price action over the coming days still depends on investor risk appetite as well as developments in London, where the mood has brightened this week after Prime Minister Boris Johnson expressed optimism about the prospects for a Brexit trade deal.

Earlier gloom about the negotiations means that wasn't difficult to do although appetite for Sterling will be tested again on Thursday by the latest Bank of England (BoE) policy meeting which could yet engender fresh weakness in the British currency. 

Above: AUD/USD and GBP/USD (orange line) rates shown at daily intervals. 

Thursday's 12:00 policy decision is widely expected to produce another dose of quantitative easing for the economy and HM Treasury, with the market looking for an additional £100bn of bond purchases to take the total amount acquired by the bank to £745bn. But it's possible the Bank could announce more than that.

"The GBPUSD is currently trading just ahead of its 200-day moving average and looks correlated at the moment, with risk-on, risk-off behaviour, though sterling did get a boost yesterday from positive spin from UK-EU Brexit deal talks. A possibly pivotal BoE meeting is up on Thursday," says Steen Jakobsen, chief economist and investment officer at Saxo Bank. "The meeting this week will be interesting to see whether the BoE strengthens guidance on an eventual move to a negative policy rate regime."

The BoE has been buying close to £14bn of government debt per week since the coronavirus came along, which is close to £60bn per month and equal to around 2.6% of GDP. The UK government borrowed even more than that during the month of April, with the total having come in at £62.1 after HM Treasury took unprecedented action to limit the longer-term damage done to the economy by the 'lockdown' used to contain the coronavirus. 

Any Federal Reserve-like commitment to continue buying bonds "at least at the current pace" for any period of time, or any fresh discussion of the perceived merits of a negative interest rate policy might not be taken well by Sterling and could constrain the Pound-to-Australian Dollar rate, which remains locked in a mean-reverting longer-term trend. Sterling has been approaching its 200-week moving-average against the Aussie at 1.7791 on the weekly chart.

Above: Pound-to-Australian Dollar rate shown at weekly intervals with 200-week moving-average in green.