Pound-Australian Dollar Rate Could See 1.84+ as Inflation Prospects Diverge

Published: Wednesday, 16 June 2021 11:02
Written by: James Skinner

- GBP/AUD foundations solidifying at 1.81
- Strong support at 1.82 & scope for 1.84+
- As 'lowflation' renders AUD/USD a laggard
- UK price pressures lift CPI to BoE target

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GBP/AUD reference rates at publication:
Spot: 1.8309
Bank transfer rates (indicative guide): 1.7667-1.7795
Money transfer specialist rates (indicative): 1.8143-1.8180
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The Pound-to-Australian Dollar exchange rate could potentially sustain a move above 1.84 during the weeks and months ahead if Australia’s ongoing battle to revive a long-inadequate inflation pulse continues to render the antipodean unit a laggard among major currencies.

Sterling edged higher from 1.83 against the Australian Dollar in the mid-week session after UK inflation surprised on the upside of market expectations, with even the core measure of price growth having overshot the consensus to reach 2% and exactly the target of the Bank of England (BoE).

While the BoE has acknowledged that inflation could even overshoot its target in the short-term due to pandemic-inspired disruptions in the supply of certain goods, it’s previously warned that these price pressures could prove to be more than just temporary and so has also already made it known that it could potentially lift interest rates sooner than financial markets so-far anticipate.

This and uncertainties about the outlook for Reserve Bank of Australia (RBA) policy saw the Pound-to-Australian Dollar rate lifting off from 1.83 Wednesday, although the exchange rate could rise further in the coming weeks if Australia’s long and ongoing battle to revive a long-inadequate inflation pulse leads the RBA to prolong the life of its currency-corrosive quantitative easing (QE) programme next month.

“The market has taken the tone of the minutes to be dovish. This is due to the cautious tone of policymakers and also to the options that were laid out regarding the decision on future government bond purchases that will be made next month. AUD/USD is currently trading back below the 0.77 level with the firmer USD also weighing on the currency pair,” says Jane Foley, a senior FX strategist at Rabobank.

“We maintain the forecast that AUD/USD will struggle to sustain levels above 0.78 on a 6 month view, though this assumes the RBA continues to take care to avoid being seen as less dovish than other major central banks,” Foley adds.

Above: Pound-to-Australian Dollar rate shown at daily intervals with AUD/USD.

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Australian Dollar declines also helped lift GBP/AUD this week after minutes of the RBA’s June meeting indicated that risks around the bank’s July policy decision are finely balanced, with a decision to extend the length of its bond-yield-crushing QE programme at least as possible as a any to begin winding it down this summer.

This is due to uncertainties around the outlook for Australian inflation which has spent years below the RBA’s target, and had already seen the bank cut its interest rate repeatedly even before the coronavirus came along in 2020 all the while making the RBA more sensitive to the impact exchange rates have on consumer price pressures.

“AUD/USD is trading just below 0.77 ahead of the FOMC. We expect AUD to lift if the FOMC is dovish. We flagged a speech by RBA Governor Lowe, ‘From Recovery to Expansion’, which could provide a boost to AUD this week," says Joseph Capurso, a strategist at Commonwealth Bank of Australia. "If Lowe uses the speech to lay the groundwork for a change in policy next month in today’s speech, we would have high confidence AUD/USD ends the month at or around 0.80."

The RBA has been attentive to the policy plans of other central banks that impact the trajectory of its exchange rates as well as inflation, which makes this Wednesday’s Federal Reserve (Fed) policy decision a key event not only for the U.S. Dollar but also for RBA policy, Australian Dollar and GBP/AUD.

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“We remain happy to stay long from below 0.7680 and to passively buy further dips down to 0.76,” says Richard Franulovich, head of FX strategy at Westpac, referring to AUD/USD.

The implications of these policies combined with responses to them by AUD/USD, GBP/USD and a bunch of other exchange rate thus far suggests that Wednesday’s Pound-to-Australian Dollar rate of 1.83 reflects the middle of a short-term trading range where 1.81 acts as an almost concrete foundation for a Pound that could rise close to the 1.85 level against the Aussie in some market conditions.

This is because the entire time the main Aussie exchange rate AUD/USD holds at 0.77 or below, then even in markets where the main Sterling exchange rate GBP/USD is testing the bottom of its rough 1.40-to-1.42 recent range the GBP/AUD rate would still be found trading above 1.81.

However the Pound-to-Aussie rate, which always closely reflects an amalgamation of price changes in GBP/USD and AUD/USD, would rise comfortably above 1.84 in any instances where both the main Sterling exchange rate is near the top of its recent range and AUD/USD is continuing to lag other counterparts as it has done through the last quarter.

“Powell’s overarching message will be that the Fed is still awaiting substantial progress, inflation is mostly a transitory story and that they remain resolutely patient. That should keep US real rates mired deep in negative territory,” Franulovich says.

Above: GBP/USD shown at daily intervals with AUD/USD and Pound-to-Australian Dollar rate.