Pound / Australian Dollar Rate Eyes 1.9052 as Big Dollar Weighs on AUD/USD

• GBP/AUD eyeing 1.9052 as antipodean currencies slip
• Fed’s hawkish policy shift lifts USD, hampers AUD/USD
• Softer AUD/USD lifts GBP/AUD support near to 1.8660
• May see GBP/AUD in 1.8660-1.9052 range short-term

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The Pound to Australian Dollar exchange rate climbed above 1.88 and appeared on course for five month highs just above the 1.90 handle in the penultimate session of the week as a strengthening U.S. Dollar drove a reversal of the December rally in AUD/USD.

Australia’s Dollar was the biggest faller among major currencies during the European session on Thursday as U.S. Dollar exchange rates rose and risky assets like stocks and commodities fell in most cases, weighing especially heavily on the commodity sensitive antipodean currencies.

Declines in Aussie exchange rates may have been exacerbated and market sentiment toward the currency dimmed further by rising numbers of local coronavirus infections, which are reportedly disrupting many businesses who’re seeing staff either taken ill or forced into self-isolation for other reasons.

However, it was minutes of the December Federal Reserve (Fed) meeting that also weighed heavily on other comparable currencies Thursday and so likely explained the bulk of the Australian Dollar’s declines, which lifted GBP/AUD sharply and unraveled part of last month’s rally in AUD/USD.

“AUD is underperforming across the board and AUD/USD fell by over 1.6% near 0.7150,” says Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.

Above: GBP/AUD shown at daily intervals with Fibonacci retracements of August 2021’s corrective fall indicating possible areas of technical resistance. Click image for a closer inspection.

• GBP/AUD reference rates at publication:
  Spot: 1.8890
• High street bank rates (indicative band): 1.8230-1.8360
• Payment specialist rates (indicative band): 1.8720-1.8796
• Find out about specialist rates, here
• Set up an exchange rate alert, here

“The Fed’s bond purchases are scheduled to end in March and fed funds futures have already fully priced‑in a 25bps lift‑off at the May policy‑setting meeting (there is no meeting in April). But the likelihood the size of the Fed’s balance sheet is reduced sooner and faster than that of other major central banks bodes well for USD,” Haddad and colleagues said on Thursday.

The U.S. Dollar was stronger and many other currencies weaker after minutes of December’s meeting revealed the Fed could become minded to begin shrinking its $8.8 trillion balance sheet sooner than was thought likely and faster than many would have imagined.

Minutes of the meeting also confirmed what was already suggested by the Fed’s dot-plot of December forecasts, which was that interest rates could rise as many as three times in 2022 and that an initial increase in the Fed Funds rate may potentially be announced as soon as March.

Financial markets have since wagered that there’s an emerging possibility of up to four increases in the Fed Funds interest rate range this year, which would take it up to between 1% and 1.25% if the Fed moves that fast once it begins withdrawing the large interest rate cuts announced in early 2020.

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“While the USA rate hikes signalled by the FOMC’s dot plot graph of members assessments of appropriate future monetary policy do not exceed 0.75-1.00% on average, some are suggesting more than three hikes, and 2022 looks set for some volatility,” says Annabel Bishop, chief economist at Investec.

Thursday’s Dollar-induced declines in Australian exchange rates were the dominant driver of GBP/AUD’s advance back above 1.88 and would see the Sterling rate foraying above 1.90 over the coming days if December’s rally in AUD/USD continues to unravel.

GBP/AUD tends to closely reflect the relative performances of AUD/USD and its Sterling equivalent GBP/USD, which also fell on Thursday but to a lesser extent than its Aussie counterpart.

AUD/USD had reversed almost half of last month’s rally in Europe’s Thursday session and appeared on course for a return to around 0.7100, which would lift the Pound to Australian Dollar rate as far as 1.9052 in the absence of intervening declines in GBP/USD.

Above: AUD/USD shown at daily intervals alongside GBP/AUD.

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Any intervening decline in GBP/USD might be quite limited however, if it’s seen at all, in light of Sterling’s buoyant performance so far in the new year.

“The start of 2022 has seen a strong performance by those currencies backed by central banks prepared to pull the trigger on rate increases. Sterling is the standout in the G10 space,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“We would expect the dollar to stay strong through the first half of the year as the Fed prepares to pull the trigger in 2Q and the market starts to price the terminal US policy rate closer to 2%,” Turner and colleagues said on Thursday.

With financial markets betting that interest rate rises from the Bank of England (BoE) are likely to keep pace with the Federal Reserve through the early quarters of 2022, Sterling has been the only currency in the G10 contingent to eke out gains over the U.S. Dollar thus far in 2022.

These gains would be likely to keep the Pound to Australian Dollar rate supported above the 1.8660 level in the event of any corrective setbacks over the coming days and weeks, unless the antipodean currency can turn the tables on the greenback in the interim.

That might be unlikely ahead of February’s monetary policy decision from the Reserve Bank of Australia (RBA), which has so far indicated that its own interest rate is highly unlikely to rise much before 2024.