GBP/AUD Week Ahead Forecast: GBPAUD Rebound at Risk as Focus Turns to UK Events

• GBPAUD has stabilised and gone higher
• But significant risks seen this week
• Watch inflation data (Weds) and Bank of England (Thurs)
• Westpac looks for GBPAUD to have peaked
• Forecasted lower over coming months

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The Pound and Australian Dollar have been vying for the top spot of the G10 leaderboard over the course of the past month with both currencies finding support as a result of rising interest rate expectations at the Reserve Bank of Australia and Bank of England.

We have seen rate expectations prove particularly supportive of Pound Sterling over the past week in particular as it advanced against all its major peers, with new multi-month highs being recorded against the Dollar and Euro following a consensus-beating jobs report.

But multi-month highs were absent from the Pound to Australian Dollar exchange rate (GBPAUD) which had been in retreat for much of June.

Above: GBPAUD at daily intervals (top) with the RSI indicator (lower panel) showing recent downside momentum has eased and is now neutral.

The newfound Australian Dollar strength was largely a result of the unexpected RBA rate hike at the start of the month and guidance that suggested further hikes are possible, which has combined with a recent rally in iron ore prices and fresh measures by Chinese authorities to boost growth.

"Nominal yield differential and iron ore prices continue to be the main driver for AUD. The currency has strengthened in the last couple of weeks following a hawkish hike by the RBA and a rally in iron ore prices," says Antony George, G10 FX Strategist at NatWest Markets.

"The recent policy response from China is positive for iron ore and AUD, and there is speculation of more policy response from China supporting iron ore prices in the near term," he adds.

But GBPAUD's week ahead is likely to be heavily influenced by UK events this week with a prospect for some near-term losses resuming should inflation data (Wednesday) and Bank of England guidance (Thursday) underwhelm.

In the last GBPAUD week ahead forecast we wrote a sizeable multi-week technical support level for the exchange rate is seen at approximately 1.86, which is where the pair could find support.

The assessment was correct in spirit as the pair was broadly supported and looked to have carved out a short-term bottom, but it did make two daily closes below 1.86 which highlights the futility of trying to pick exact numbers.

The subsequent stabilisation has allowed the GBPAUD exchange rate to form a near-term base and edge higher into the new week that will have a distinctly UK-heavy flavour. Given the Pound's recent rally leaves it looking extended against some major pairs, and given already-elevated Bank of England rate hike expectations, downside risks are looking particularly elevated.

Pound Sterling has been boosted of late by rising short-term UK bond yields which in turn reflect expectations for further Bank of England rate hikes, owing to the UK's 'sticky inflation' problem.

Therefore the immediate risk to the Pound Sterling uptrend lies with the CPI inflation report on Wednesday, June 21 where a downside miss could see Bank of England rate hike expectations deflate, which would prompt an unwind in GBP strength.

The Bank of England then delivers its next hike the following day on June 22 and could introduce some 'dovish' guidance on any inflation undershoot; after all the Bank will be eager to bring an end to its hiking cycle to avoid prompting a deep recession.

"Our conclusion is that in addition to next week, the MPC will raise the Bank rate in August and September resulting in a terminal rate of 5.25%. Previously we had expected the Bank rate to peak at 4.75%. Our baseline case is that rates will not rise as far as 6%, but policymakers are currently in a state of heightened data dependency and we note that significant risks exist in both directions," says Philip Shaw, Economist at Investec.

A downside risk to Sterling would come from any guidance that confirms expectations for a peak in Bank Rate at 6.0%, as the market is currently expecting, is too adventurous.  We would expect 1.85 in GBPAUD to be tested on a UK inflation undershoot or a cautious statement from the Bank of England.

Another risk would be inflation coming in well above expectations, a counterintuitive position to what has already been written above regarding the impact of below-consensus inflation.

This is because there is a risk an inflation blow-out could prompt a surge in bond yields (pushes up mortgage rates etc) and raises the prospect of a deep recession forming at some point in the coming months.

Such an outcome could be GBP negative.

So for the immediate term, an on-target inflation print would likely be required to underpin the Pound's recent stabilisation against the Aussie Dollar.

Elsewhere, economists at Australian lender Westpac have updated their Australian Dollar forecasts to show the peak in GBPAUD has likely been met and a trend of depreciation that will last into 2024 is now at hand.

The Australian to Pound exchange rate is forecast to trade at 0.54 by September through to year-end ahead of a move to 0.55 by the end of March 2024 and 0.56 by end-June 2024.

This gives a Pound to Australian Dollar exchange rate profile of 1.85, 1.82 and 1.78, confirming a top has been achieved.