Pound-to-Australian Dollar Goes Back Above 1.80, can it Push Higher?

- GBP/AUD rallies 1.0% over the course of past 24 hours
- GBP arrests multi-week downtrend
- But the longer-term decline could yet resume

Above: A tree wears a face mask on St Kilda Road, Melbourne during the Coronavirus Crisis in Melbourne, Australia. Credit: Dave Hewison Image © Adobe Images

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The Pound-to-Australian Dollar exchange rate has rallied back above the 1.80 level having posted a 0.90% advance on Tuesday and a further 0.20% in the mid-week session taking the pair to 1.8098 with technical studies suggesting further advances could be possible in the short-term, however the longer-term trend does still appear to be pointed lower.

Pound Sterling advanced against all its major peers on Tuesday amidst fresh signs of potential progress in EU-UK trade negotiations which left markets looking to be potentially too pessimistic on the prospects for progress while the Australian Dollar appeared to be weighed down by a decline in global stock markets and the imposition of a six-week lockdown in Melbourne.

The 1.0% recovery over the course of the past 24 hours could confirm a temporary floor at the June 30 low at 1.7868 has been slipped under the GBP/AUD exchange rate. The pair has been trending sideways since mid-June but we would look for a break above the June 19 range highs in the vicinity of 1.8152 before we suggest the post-March downtrend in the exchange rate has broken.

Above: The near-term sideways range in GBP/AUD

"Constructive price action in GBP/AUD supported by recent fundamental developments. Price back above 8 EMA which has done a decent job to capture downtrend. Support around 1.7860 holds after another retest," says David Cheetham, an analyst at at IFR.

Cheetham says the 23.6% fibonacci retracement of the post-March down move located at 1.8569 could prove to be a potential upside target for the pair, with another target located at the 38.2% retracement at 1.9006 being a second potential target.

Gains in Pound Sterling come after fresh reports the EU could be willing to compromise on the issue of fishing rights in the current Brexit trade negotiations that could unblock a key sticking point in negotiations. Signs of compromise on the matter were telegraphed via a transcript of the EU's Chief Negotiator Michel Barnier's meeting with the Lords Select Committee on the European Union, which was released yesterday.

Further details on the matter can be found here.

The Australian Dollar has meanwhile under-performed of late courtesy of a retracement in global stock markets from recent highs, confirming that the currency remains highly attuned to broader developments in global markets.

Should the pause in the rally extend a while longer we would expect the Aussie Dollar to cede further ground and allow the likes of the Euro, Pound and U.S. Dollar to notch up some gains.

The domestic picture is meanwhile distinctly unsupportive with ongoing anxiety over a covid-19 outbreak in Melbourne, Victoria that has resulted in the introduction of a six week lockdown being imposed.

"This will take a significant hit on Australia’s economy and weigh on AUD. Victoria’s economy is worth 24% of the national economy. And Melbourne’s population is around 20% of the national population," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "AUD/USD eased towards the middle of its four‑week 0.6800‑0.7000 range."

We would expect anxieties over the lockdown to weigh for the time being but we would add that the speed with which authorities have acted should ultimately keep the outbreak contained.

Domestic issues rarely have a long-term bearing on the value of the Australian Dollar which remains heavily influenced by global investor confidence and the health of global trade which continues to recover.

Australia's sizeable export base means it ship billions of dollars worth of iron ore, coal and natural gas around the world every year and economic stimulus measures in China are creating a particular demand for those commodities Australia has in abundance.

Therefore while the GBP/AUD looks to be building some short-term momentum it must be noted that the broader downtrend in the pair does remain intact owing to the improved global backdrop that is ultimately supportive of the Australian Dollar.