GBP/AUD Week Ahead Forecast: Buoyant Above 1.96

Image © RBA.

The Pound to Australian dollar exchange rate has leapt to post-pandemic highs in recent trade and the author’s model suggests it’s likely to remain buoyant above the nearby 1.96 handle over the coming days.

GBP/AUD has rallied to almost 1.98 and its strongest level since the onset of the coronavirus pandemic in March 2020 amid another meltdown in global markets that has upended popular carry trades in recent weeks.

High beta currencies and high carry favorites alike have come apart at the seams as worries about the global economy weighed on stock markets around the world, while providing an additional boost to low-yielding funding currencies like the Japanese yen, and weighing on the Australian dollar.

“Obviously, there is a lot more going on than just politics, as the AI narrative peaked in late June, the economic data in the US is curdling, and Mr. Market has morphed into a rabid dog, tearing up every popular position and carry trade. It’s a bit of a perfect storm,” said Brent Donnelly, president at Spectra Markets.

The Australian dollar has also been hampered of late by second quarter data showing inflation ebbing in line with Reserve Bank of Australia forecasts for the period, and soft core inflation, which led markets to abandon their last remaining hope of seeing the cash rate raised again in August.

Above: Pound to Australian dollar rate shown at daily intervals with selected moving averages and Fibonacci retracements of June rally indicating possible areas of support for the pair.

“AUD was under pressure last week as a downside surprise on core inflation brought the RBA’s hawkishness into question. This likely takes another hike at the RBA meeting on Tuesday off the table but the bank’s tone is likely to still be hawkish,” Barclays strategists said in a Sunday note to clients.

The Reserve Bank of Australia left its cash rate unchanged at 4.35% on Tuesday and noted that inflation is proving persistent, leading the Australian dollar to rise while capping GBP/AUD below 1.98.

The author’s model suggests 1.98 will remain a ceiling for GBP/AUD over the coming days, however, and that it should also be likely to remain well supported above the 1.96 level.

“We expect it will be some months before the RBA considers a cut to the cash rate. AUD/USD will stay heavy this week, spending much of the week below 0.6500 in our view. Should concerns about a recession in the US increase again, AUD/USD can fall significantly,” Commonwealth Bank of Australia strategists said on Tuesday.

“AUD/GBP has fallen below key support levels recently. The path of least resistance is down to below 0.50 this week [GBP/AUD above 2.0] because of concerns about a US recession,” they also said.

Above: Pound to Australian dollar rate shown at weekly intervals with selected moving averages indicating possible areas of technical support for Sterling.