Australian Dollar Recovery v Pound Tipped to be Short-Lived

The Aussie dollar exchange rate complex (AUD) has caught a break and is pushing higher sending the UK’s pound sterling to a key support level.

Have we seen the GBP achieve its best levels against the Australian unit of 2015?

The good news for those looking to buy AUD is that a new forecast does warn that the current relief afforded to the Australian unit is likely to be temporary in nature.

If so, we could well see the British pound restart its ascent towards the 2.0 region.

The climb higher received a major blow when the RBA’s steady hand proved to be the biggest surprise to markets in a long time.

Markets have now ensured the GBP-AUD is heading back towards the lower limit of its upside channel.

We get the sense that a break through this level is nigh, and with UK elections coming up this clean wave pattern could come undone and consolidation will likely become the order of the day.

The sum of this viewpoint is that those hoping for a higher pound to Australian dollar exchange rate (GBP-AUD) will have to wait until at least the end of May for the best levels of 2015 to be tested once more.

Be conscious that all FX quotes in this piece reference the wholesale markets rates - your bank will affix a discretionary spread to this wholesale rate to derive their profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances, learn more here.

Why the AUD has Strengthened so Rapidly

The powerful rally in the Aussie dollar is testament to just how much markets were priced for an interest rate cut at the RBA.

“Pricing for a cut was around 75%, backed by the ongoing slide in iron ore prices (only partially matched by AUD decline), the strong signal in the March statement that another rate hike was not far away and an assumption that there was no need to wait for Q1 CPI data on 22 April,” says Sean Callow at Westpac in Sydney.

Adding to market confidence was a flurry of predictions of an April cut by RBA watchers in the media, many of whom were on the money for the February rate cut.

A May RBA Cut is Likely: This is AUD Negative

The commencement of the GBP’s rally against the Aussie could come in May.

The UK general election is due on the 7th, and we would hope that by mid-May at the latest a formal coalition or governing structure is arranged.

Once this is done the prospect of a rally higher in GBP is made possible.

The Australian dollar is meanwhile likely to be undermined by that elusive second interest rate cut.

Westpac believes a cash rate cut to 2% is very likely.

“Governor Stevens’ statement declared that further easing may be appropriate and included the phrase ‘for the time being’ to qualify the steady hand. This has been a very reliable signal of an imminent move over the past 5 years,” says Callow.

That said, Westpac’s base case is that the RBA will pause for some time after cutting in May, such that the low in the cash rate is more likely to be 2% than 1.75%.