Australian Dollar Strengthens but Outlook Ultimately Favours the Pound

The RBA has indicated it could cut interest rates again in April – a move that could ultimately arrest the decline in the GBPAUD pairing.

The British pound to Australian dollar exchange rate (GBP to AUD) is seen trading with a weak bias and is currently quoted at 1.9365.

The latest declines Sterling come following indications that the UK's Bank of England will not seek to raise interest rates before 2016.

Nevertheless, the British economy remains strong and while the current declines represent a continuation of a poor period for sterling, if we take a step back to consider the longer-term picture we see the pair still firmly placed within the context of a broader rally:

Basic technical analysis would suggest to us that the declines could end by April as the lower end of the upward channel is met at around 1.9000.

That this is also a round and psychologically notable level could provide further support to the pair.

However, risks remain that the UK elections leave the country in a protracted period of uncertainty; something that would surely result in a fresh crack lower in GBPAUD.

Please note, that all levels mentioned here refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more.

Australian Dollar: RBA Could Cut Rates in April

The other side of the coin is that the Aussie dollar undergoes a fresh dip in April, supporting our core belief that the uptrend back above the 2.0 zone in GBPAUD remains viable.

According to analysts at ANZ Bank April is when the Reserve Bank of Australia could cut interest rates, a negative scenario of the Aus dollar.

The prediction comes following the release of the minutes from the March policy meeting of the RBA.

The minutes repeated the Bank’s key signalling language, noting that “members judged it appropriate to hold the cash rate steady for the time being, while recognising that further easing over the period ahead may be appropriate to foster sustainable growth in demand while maintaining inflation consistent with the target”.

Felicity Emmett at ANZ tells us that history shows that the Bank uses this language just prior to changing the cash rate.

Over the past six years, they have used the phrase “time being” five times, and in each case the Bank has moved the cash rate the following month.

Moreover notes Emmett, the Bank has a tendency to move in fairly quick succession in the early part of a cycle given that the impact of one 25bp rate cut on the economy is very small.

While the RBA seeks to cut interest rates the Bank of England is ultimately seeking to embark on interest rate rises as the UK economy continues to outperform.

Higher interest rates present global investors with a higher return on money, and as such currency flows from Australia to Britain could prompt gains in the pound to Australian dollar.

Ultimately we forecast a sustained breach and holding of the 2.0 GBPAUD ceiling.