Pound a Sell against Australian Dollar Through to Year-end: Bank of America

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The Pound to Australian Dollar will unlikely attain the round figure of 2.0 and can fall over the remainder of 2023, according to a new analysis from Bank of America (BofA).

Strategists at BofA are tactically 'short' on the GBP/AUD exchange rate, meaning they are looking for further losses from current levels.

The pair has already fallen from highs at 1.9971, reached on August 17, to quote at 1.9238 at the time of writing and Howard Du, G10 FX Strategist at BofA, says "we like to fade GBP/AUD rallies with pair staying below 2.00 resistance."

Analysis from the investment bank finds the market's long GBP positioning is now at risk as achieving UK disinflation - i.e. killing inflation with interest rate rises - looks increasingly costly to economic growth.

The Bank of England is expected to raise interest rates again to 5.5% this Thursday, but analysts think this could be the final hike of the cycle as the Bank will grow increasingly concerned further hikes will prove costly for UK economic growth.

Du notes the scale of the 2023 Pound-Australian Dollar rally has been outsized: "In G10 space, GBP has been one of the best performing currencies while the high-betas (AUD, NZD, NOK, and SEK) and JPY have lagged behind. GBP/AUD has appreciated around 10% year-to-date; the magnitude of the rally would rank at 93rd percentile over the past 20 years."

"A rally of this size is ultimately unsustainable as UK growth slowdown becomes more apparent, in our view," he adds.

Above: "Economists expect Australia growth to outpace UK in the coming quarters" - Bank of America. Chart shows consensus QoQ GDP projections for UK and Australia.

As such, BofA's strategists now expect some retracement of the British Pound's strength against the previous G10 laggards like the Australian Dollar into year-end.

BofA meanwhile warns that more Bank of England rate hikes priced from here as not necessarily good news for GBP owing to the negative impact they would have on growth.

The BofA findings come as renowned economist Nouriel Roubini says the Bank of England needs to hike beyond 5.5% to get a proper grip on inflation, as stopping too soon would prove costlier in the long run.

Above: "Bearish turn for GBPAUD (Weekly chart) Wave v up ended at 2.00 which is also a long-term resistance line. TD Setup sell signal (9) still active. RSI turning down from overbought. MACD near a bearish cross" - Bank of America technical analyst Paul Ciana.

Turning to the Aussie side of the equation, BofA reckons the market has reached a maximum pessimism on China and improved sentiment from here can boost the Australian Dollar.

"Sentiment has become too bearish," says Du, "AUD weakness is symptomatic of a circumspect RBA that is likely done with rate hikes, as well as weak China growth, especially the commodity-intensive property sector."

"The fact that China sentiment is already approaching bearish extremes suggests positioning for some reversal is prudent," he adds.