Pound-Australian Dollar Week Ahead: Upside Limited as RBA Holds Key to Higher Levels

- GBP/AUD holds 1.83, is well supported above 1.82
- But faces confinement in 1.83-1.84 range short-term
- As RBA looms over AUD, after BoE leaves GBP hanging

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The Pound-to-Australian Dollar exchange rate rose back above the 1.83 handle early in the new week but may struggle to sustain much of any further recovery ahead of July’s policy decision from the Reserve Bank of Australia (RBA) next week.

The Pound-to-Australian Dollar rate was attempting to lift off from the 1.83 round number on Monday after rallying back from last Friday’s lows near 1.82 during the overnight hours, although the exchange rate may struggle to get past 1.84 again this week.

Sterling fell briefly to 1.82 when the Bank of England (BoE) poured cold water over suggestions it might have been close to becoming ‘hawkish' in its policy stance, which was one of the popular reasons given in arguments for a higher GBP/AUD rate in recent months.

The Pound had traded as high as 1.85 ahead of the BoE’s update but if Sterling makes it back to or above that level at all over the coming weeks it might not be without weakness having been inspired in the main Australian exchange rate AUD/USD first.

“The A$ is cheap below 0.8230. However, rising trade tension between China and Australia plus return to lockdown in NSW should keep markets wary meaning AUD/USD should remain capped between 0.7580 and 0.7600 near term,” says Richard Franulovich, head of FX strategy at Westpac.

Above: Pound-to-Australian Dollar rate with Fibonacci retracements of 2021 rally and AUD/USD.

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Aussie weakness may be unlikely ahead of next week’s RBA decision however, given how the antipodean unit took the weekend’s renewed ‘lockdown’ in parts of New South Wales in its stride, while also holding up well amid an early rebound by the U.S. Dollar.

“The geographical spread of the virus across New South Wales and the high rate of transmission of the Delta variant could mean this lockdown lasts longer than two weeks. How much this episode drags on the recovery will depend on how quickly the outbreak is contained and how quickly services can reopen,” says Matthew Bunny, an economist at St George Bank.

“The regions in lockdown in the state account for around 25% of Australia’s economic activity,” Bunny adds.

AUD/USD was hovering above 0.7550 early this week after the new restrictions and tentative stabilisation of the greenback proved unable to inspire meaningful declines, although by preventing the exchange rate from rising they did lend support to GBP/AUD at the margins.

And with little ahead in the calendar to provide either the Aussie or Sterling with direction this week, the Pound-to-Australian Dollar rate could find itself effectively sidelined between 1.83 and the 1.84 leading into next Tuesday’s RBA decision.

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“Despite the divergence in forward guidance between the dovish RBA and the slightly hawkish FOMC, markets are pricing a late 2022 RBA cash rate hike. If the RBA turns more hawkish at the 6 July meeting, the risk is Australian interest rates rise and push AUD higher,” says Kim Mundy, a strategist at Commonwealth Bank of Australia.

The RBA is expected to reveal next Tuesday whether it will duplicate and repeat the A$100bn quantitative easing programme (QE) that expires in September, which would likely weigh on the Australian Dollar and potentially lift GBP/AUD given increasingly prevalent suggestions among analysts that the bank might be minded to reduce the size of the programme.

There are further risks to the Australian Dollar and GBP/AUD stemming from what the RBA might say in response to recent changes in market expectations for Australia’s record low 0.10% cash rate, as some investors are betting the bank will lift its cash rate as soon as the end of next year.

This is in contravention of existing guidance from the RBA that suggests borrowing costs are unlikely to rise before “2024 at the earliest” and could be one source of disappointment fo the market and Australian Dollar declines if the RBA rejects the above notion at next Tuesday’s meeting.

“Our economists still expect that the RBA will not initiate lift-off until May 2024, as currently implied by their April 2024 YCC target and forward guidance. This is generally due to the fact that the inflation and employment hurdles for the RBA to change policy are fairly high. Inflation has remained persistently below the midpoint of the RBA’s target band for a number of years, and recent inflation pressures have been subdued,” says Zach Pandl, co-head of global foreign exchange strategy at Goldman Sachs.

Above: Pound-to-Australian Dollar rate shown at weekly intervals alongside AUD/USD.