Australian Dollar Forecast to Strengthen Against the Pound by Westpac

Foreign exchange analysts at Westpac Bank in Sydney are calling time on Pound Sterling’s recent strong run against the Australian Dollar.

“We should see AUD rise against GBP in the weeks ahead,” says Martina Song, an analyst with Westpac, in a note to clients dated May 22.

The call comes as the Pound to Australian Dollar exchange rate (GBP/AUD) is seen trading at 1.7408 ensuring it is now well below the highs towards 1.76 recorded in mid-May.

The faded momentum and subsequent retracement alone suggests the strong mid-March to May rally has faded:

Short-term, Brexit uncertainties have been outweighed by the June 8 general election in the UK.

However, part of the reason for the rally in Sterling on the election announcement was the assumption that Prime Minister May’s Conservative Party was set to increase its majority considerably.

Recent polling suggests this might no longer be the case and we have seen Sterling fall back as a result.

Song does acknowledge though that there is scope for GBP/AUD to trade up to the 1.78 area before falling back towards 1.68.

Much of this assumption on any further Sterling upside could therefore apparently rest with how well the Conservatives do in the polls leading up to June 8 and in the election itself.

“Renewed Brexit concerns or faltering consumer data could trigger a correction,” says Song.

British Pound Still Below Average Price Against the Aussie Dollar

Data supplied by Westpac shows AUD remains above its long term average rate versus Sterling.

The 1.60-1.75 range accounts for only 6.7% of daily closes since the 1983 AUD float.

AUD reached its strongest point against the Pound since June 2013 in October 2016 after the pound suffered its “flash crash” and struggled to recover in the weeks following.

At the beginning of 2017, AUD was the biggest beneficiary of a weaker USD among G10 currencies, while GBP made the smallest gains.

Since late March however, AUD has been steadily weakening against GBP.

This would suggest that for those with payments out of Australia, these remain relatively decent levels to exchange.

For those holding Pounds looking to buy Aussie Dollars, the hope would be that Sterling ultimately works back to equilibrium levels.

That said, if payments must be made in the near term consider you can still achieve up to 5% more currency by using the right foreign exchange provider; don’t make a bad situation any worse by using your bank to transfer money.

UK Economic Data Pulse Leaves the Pound Vulnerable

Meanwhile, it is noted that the Aussie Dollar might find further upside impetus against Sterling based on the relative performance of the two economies.

Australia’s data pulse (% of data stronger than the previous release in a rolling 8 week window) has been choppy this year, spending plenty of time both above and below 50%.

“The pulse appears to be consistent with an economy that – notwithstanding the volatility in GDP in H2 2016 – is growing at a moderate pace,” says Song.

Australian employment data has picked up recently however.

The residential construction pipeline remains very large and the outlook for exports has brightened considerably in recent months.

Australia’s trade surplus has averaged A$3bn over the past 3 months, a huge swing from deficits averaging -$2.9bn a year earlier which should provide some longer-term stability for the currency which is unlikely to suffer volatility as fickle global investors play the money markets.

Meanwhile, Westpac’s UK data pulse has dropped sharply over the last few weeks.

If the pulse starts to revert to mean again then perhaps the Pound will find support?

But, Song’s stance for a weaker GBP/AUD suggests an assumption that UK economic data might not prove supportive to Sterling over coming weeks.

The trend of more positive data since August last year had been something of a surprise to the Bank of England.

The MPC upgraded its outlook in its February Inflation Report, noting fiscal stimulus, improvements in global activity as well as stronger than expected domestic demand.

Growth projections for 2018 and 2019 were revised marginally higher again in May.  

“We still expect that Brexit negotiations and rising CPI will impact discretionary consumer spending. The potential of a second Scottish independence vote too adds to uncertainties and we will see how this affects activity,” says Song.

Meanwhile the negative bets made against the Pound have been pared back which might explain some of the recent strength in GBP/AUD.

Leveraged funds had kept aggressive shorts in GBP for the first few months of this year but have since reduced these shorts to -11k, the smallest short position in nearly a year, the smallest since the Brexit vote.

“With positioning in both currencies trimmed, AUD is less vulnerable to GBP squeezes,” says Song.