Pound-Australian Dollar's Relentless Decline Forecast to Extend, but New Covid-19 Cases in Victoria has Potential to Curb Aussie's Enthusiasm

- Covid-19 cases rise in Victoria
- GBP/AUD continues to obey clear downtrend
- But AUD at risk of covid-19 concerns blowing up again

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The Pound-to-Australian Dollar exchange rate is likely to extend a well-defined and entrenched decline over coming days and weeks, however the Aussie Dollar's ongoing bout of appreciation against Sterling and other currencies could stumble if an outbreak of covid-19 infections in Victoria is not contained.

The Australian Dollar has outperformed its developed market peers for a number of weeks, driven by a narrative that the global economy is recovering and Australia has emerged from the covdi-19 relatively unscathed: both assumptions are being tested at the start of the new week.

The benefits of reopening the domestic economy earlier than others peers has been seen by analysts as a supportive development for the currency, but this could be questioned in light of rising cases of infections in Victoria which recorded 75 more cases in the past 24 hours, health authorities announced on Monday.

The new cases have contributed to concerns the nation may be on the cusp of a second wave of cases as it removes lockdown restrictions that have crippled the economy.

The surge in cases are centred around Melbourne's northern and western suburbs.

Victoria Premier Daniel Andrews, has indicated that some of those areas may need to return to stricter lockdown measures, and blamed some clusters on large family gatherings that have broken social-distancing restrictions.

While a rise in covid-19 infections is concerning, the number of cases ultimately remains relatively small and containable and the ability to locate and isolate pandemic outbreaks should mean the country avoids a nationwide lockdown, therefore the domestic incidence of covid-19 in Australia is unlikely to concern bulls buying into the Aussie Dollar recovery for the time being.

Indeed, the Australian Dollar retains a positive bias against the Dollar, Euro and Pound, with GBP/AUD likely to extend a multi-week period of decline in the near future as a result.

GBP/AUD is quoted at 1.7973 at the time of writing at the start of the new week and continues to obey a downtrend line that has defined moves in the exchange rate since April 20:

We would imagine that as long as the exchange rate remains below the trend line further losses are likely as there is little by way of technical evidence that suggests anything but obeying the trend, but a break above the line could signal the potential for some consolidation, from which a rebound could even emerge.

For a recovery we would however require the market to adopt a sea-change in sentiment towards Sterling as currently the UK currency is beholden to a combination of three drivers: Brexit trade negotiation anxieties, broader covid-19 market trends and Bank of England monetary policy.

All of the above factors are currently proving unhelpful for the Pound which suggests a bullish development in GBP/AUD remains relatively remote for the time being.

The Australian Dollar meanwhile looks set to continue benefiting from a gradual improvement in investor sentiment regarding the status of the global economy. Of course, the road to recovery is by no means smooth and the past two weeks have seen markets fret about secondary infections in the United States, and the fact that the global covid-19 count continues to surge to new records.

"Risk aversion has taken more of a grip on major markets in recent sessions as a drip feed of negative newsflow surrounding second wave infection rates of COVID-19 has increased. Infection rates rising again in Japan, Australia and Germany are a concern, but alarming increases in the infection rate curves across several US states have made traders sit up and take note," says Richard Perry, market analyst at Hantec Markets.

When markets and commodity prices fall back, we would expect the Australian Dollar to fall in sympathy as it remains highly leveraged to global investor sentiment.

"G10FX is an equity trade. The typical high-beta currencies like AUD/NZD/CAD have led the G10 complex in performance against the USD amid high and stable correlations to equities," says Mark McCormick, Global Head of FX Strategy at TD Securities.

Should concerns over the U.S. covid-19 pandemic continue to grow the market sell-off could snowball, which could potentially pose the first real risk to the Aussie Dollar's recovery story and give GBP/AUD a shot at recovering.

"The emergence of the U.S. from economic shutdown will need to be re-calculated as several states re-instate elements of lockdown procedure. The weight of this on the risk recovery is growing," says Perry.