GBP/AUD Week Ahead Forecast: Rally Stretches its Legs

A clampdown on technology exports to China are weighing on AUD. Image © Adobe Stock.

Should global investor sentiment deteriorate further in the coming days, there is a good chance that GBP/AUD will make a run for 2024 highs at 1.9570.

The Pound is engaged in a powerful rally against the Australian Dollar, helped by Monday's Chinese interest rate cut and broadly unsteady investor sentiment amidst deepening U.S. political intrigue.

The People's Bank of China (PBoC) unexpectedly cut interest rates 10 basis points to 1.70%. "The PBoC cut may be the start of 2H easing to help the economy get to 5% growth, as the 3rd plenum reiterated the pledge to hit the 2024 target," says Wei Yao, Head of Research Asia Pacific at Société Générale.

"AUD/USD is around 30 pips lower following the People’s Bank of China’s unexpected decision to reduce its key policy interest rate. The interest rate cut and the outcomes of the Third Plenum are too modest to convince market participants of a significant acceleration in the Chinese economy is in prospect," says Joseph Capurso, FX strategist at Commonwealth Bank of Australia.

The Pound to Australian Dollar exchange rate is 0.40% higher on the day at 1.9393; it is on course to notch its eighth daily rise in nine.

The recovery represents a potential turn in trend as last week saw GBP/AUD decisively break above the 50-, 100- and 200-day moving averages. This makes our Week Ahead Forecast model tactically bullish on GBP/AUD.

Above: GBP/AUD at daily intervals. Track GBP/AUD with your custom alerts; find out more here

There is some near-term cause for caution, as the daily RSI hit 70 this morning, meaning it has entered an overbought state. This could mean the GBP/AUD exchange rate consolidates or pulls back on short-term timeframes.

But an exchange rate can trade at overbought for a couple of days, so it doesn't necessarily mean the powerful rally is about to stall just yet. After all, it is the global picture that is weighing on AUD at present.

Markets are increasingly attuned to U.S. politics, where over the weekend, Joe Biden announced he was withdrawing from November's vote. Regardless, there don't seem to be any clear positives out of the U.S. at the moment for the Australian Dollar.

Last week, Biden's administration intensified efforts to block technological exports to China.

The U.S. said it's considering using the most severe trade restrictions available if companies such as Tokyo Electron Ltd. and ASML Holding NV continue giving the country access to advanced semiconductor technology.

The frontrunner in the presidential race is Donald Trump, who has clearly committed to intensifying tariffs. The outlook for China-U.S. trade relations looks bleak, no matter the party in control of the White House.

For the China-focussed Australian Dollar, these are negative developments.

Should global investor sentiment deteriorate further in the coming days there is a good chance that GBP/AUD makes a run for 2024 highs at 1.9570.

However, a rebound in AUD will be possible if investor appetite improves after this current wave of news headlines washes over.

"Barring major surprises, we still believe investors should stay the course and not make major changes to their portfolios," says Carsten Menke, Head of Next Generation Research at Julius Baer.