Australian Dollar Rallies Against Pound but GBP-AUD Forecast to Ultimately Reach 2.04

The pound sterling remains set to advance against the Australian dollar with momentum and fundamental data advocating for gains, despite recent RBA-inspired weakness.

The pound sterling has fallen back below the 2.0 level against the Australian dollar at the start of the new month following what turned out to be a hawkish RBA rate decision and briefing.The RBA left rates unchanged, and mentioned the benefits of a weak currency, but they importantly also warned about the hot property market.

Traders are buying the Aussie dollar on the observation that these property market fears may scupper any further AUD-negative interest rate cuts in 2015. The GBP to AUD exchange rate is seen at 1.9780 at the time of writing. The pair hit a maximum of 2.0057 in the previous week, the best level since 2009 for those using sterling to buy the antipodean currency.

It would appear that for now 2.0 appears to be resistance to advances. That said, we believe the chance of a sustained break and advance higher from this level remains a strong possibility owing to short, medium and long-term momentum that remains solidly in favour of sterling.

We find technical studies as being one of the most compelling arguments supporting our positive sterling v Aussie dollar forecast. As the following graphic shows, the GBP-AUD has been caught in an upward-facing trend since September 2014:

The channel appears to be well established and we had warned earlier in the year that 2.0 would be achievable. We believe the nature of trade leading us to the latest attempt on 2.0 means this level will become more sustainable.

Indeed, the next target now lies at 2.0400, an exchange rate that could be hit by as early as July. Be aware that any currency rate referenced here refers to the wholesale markets, when you make an international payment / transfer your bank will offer you a rate at their discretion. However, using an independent provider will get you closer to the market rates, in some instances this results in up to 5% more FX being delivered, find out how.

Australian Dollar Outlook – the ANZ View

ANZ Bank have confirmed at the start of June that they remain structurally bearish on the AUD and the British pound is one currency, alongside the US dollar, that is forecast to make gains.

“GBP offers the best fundamentals next to the USD - strong fundamentals in the UK will drive GBP outperformance,” says the latest currency strategy note from ANZ. The UK economic growth story remains alive with the release of CBI data suggesting the economy is growing at its fastest pace in 12 months.

The ANZ view comes hot on the heels of a similar stance held by Deutsche Bank – the world’s largest currency dealing organisation. Deutsche have told clients that they are expecting GBP outperformance against the Australian dollar, the euro and the New Zealand dollar.

That said, it is not all negativity out there for the Aus dollar – Bank of America strategists reckon the currency will likely enjoy gains against the New Zealand dollar. BofA are targeting 1.3566 in AUD-NZD.

Australian Investment Expectations Decline, But Don’t Expect a RBA Cut

Last week’s CAPEX report suggests that the anticipated recovery in non-mining investment remains quite some time off; it was this revelation that prompted a new round of AUD weakness. The economic boom seen in the Australian mining sector over recent years has allowed the RBA to maintain high interest rates which in turn attracted foreign money and pushed the Aussie to record highs against most major currencies.

Now that the mining boom is over it will be up to the remainder of the economy to keep momentum going.

The previous quarter’s CAPEX survey suggested that firms were looking to cut their investment expenditure in 2015-16, and those expectations actually managed to worsen over the intervening three months. The latest survey implies that non-mining businesses plan to reduce capital investment by 10% in 2015-161.

Despite the poor data currency watchers should not price in a third knee-jerk interest rate cut from the RBA in response.

“The RBA will be disappointed by this soft result, but we still expect the Bank to sit tight at tomorrow’s Board meeting, and for rates to remain on hold into the foreseeable future,” says Felicity Emmett at ANZ.

The speed of decline in the AUD has been gradual, we don’t expect the currency to give up ground easily. As such the prospects of bouts of strength should be expected and planned for.

Nevertheless, any deep declines in GBP-AUD should be considered as good entry points to chase the trend higher.