GBP/AUD Recovery Could Fade Without Boost from BoE

• GBP/AUD attempting further reversal of July declines
• Benefiting as RBA’s caution on rates holds back AUD
• But may struggle above 1.76 ahead of BoE decision
• BoE poses risk for GBP as AUD eyes RBA forecasts 

Image © Adobe Images

The Pound to Australian Dollar exchange rate has further reversed its July decline during the opening days of August but could struggle to advance much beyond the nearby 1.76 level in the absence of an additional boost from the Bank of England (BoE) this Thursday.

Australia’s Dollar featured as an underperformer among major currencies for the week to Wednesday after being dealt a setback by the market in the wake of the latest Reserve Bank of Australia (RBA) monetary policy decision on Tuesday, which helped to lift GBP/AUD to one-month highs.

This was after Governor Philip Lowe said prominently in August’s monetary policy statement the RBA places a high priority on keeping the domestic economy on an “even keel” as the bank uses its interest rate policy to bring inflation back to within the two-to-three percent target range.

“Even if the BoE does hike by 50bp, much will depend on whether it’s a “once only” type of move where the associated message leads the market to mark down future hikes, or instead truly points to at least one more 50bp hike. The former would be reminiscent of the RBA outcome yesterday which prompted AUD weakness,” says Shahab Jalinoos, head of FX strategy at Credit Suisse.

“That outcome would also likely hurt GBP,” Jalinoos said on Wednesday.

Above: Pound to Australian Dollar rate shown at 4-hour intervals with Fibonacci retracements of July decline indicating possible areas of short-term technical resistance for Sterling. Click image for closer inspection. 

There is a lot to be determined for the Pound by whether the BoE will lift its Bank Rate by a typical quarter percentage point to 1.5% or if it will opt for one of the larger half percentage point increases that have recently been used elsewhere in the world including in Australia.

Pricing in the certain parts of the derivatives market errs in favour of the latter but only just and reflects high uncertainty over the outcome, which may be why GBP/AUD was unable to sustain Tuesday’s advance above 1.76. 

“In yesterday’s post meeting statement the RBA acknowledged the difficulty of bringing inflation back to target while not causing the economy to slow too much,” says Kristina Clifton, a senior economist and currency strategist at Commonwealth Bank of Australia. 

“It fits very much in line with the view of our Australian economics team that the RBA will take the cash rate to 2.60% over coming months (around the RBA’s estimate of neutral) and then pause,” Clifton said on Wednesday.

The RBA said on Tuesday that it still expects to lift Australian interest rates further during the months ahead but was also clear that it will be cautious as it does so and this potentially opens the door to the possibility of the bank reducing the size of its rate steps in the near future.

Above: AUD/USD shown at 2-hour intervals with Fibonacci retracements of various July attempts at recovery indicating possible areas of short-term technical support for the Australian Dollar. Click image for closer inspection.

“As a result, the terminal rate priced in for the current tightening cycle by bank bill futures fell from 3.52% to 3.37%, and AUDUSD retreated from above 0.70,” says Alvise Marino, an FX strategist and colleague of Jalinoos at Credit Suisse.

“We continue to see risks for AUD as skewed to the downside for the rest of Q3, and with AUDUSD trading near the top end of our 0.6480-0.6950 target range we look at downside expressions of our view,” Marino and colleagues said.

So far the RBA has mostly lifted its cash rate in larger-than-usual increments of 0.5% while financial markets have come to anticipate that it would continue to move at that pace over the coming meetings and so any reduction in the size of its rate steps could further undermine the Aussie.

There is a potential rub for the Pound to Australian Dollar rate, however, and that’s the risk of the BoE deciding to continue on Thursday at the same steady pace that it has characterised its monetary policy normalisation process since it began in December 2021.

“Since then some BoE speakers have said that the pound has a role to play in monetary policy settings and indeed the trade-weighted pound has rallied 3% from its lows in July (largely on the back of the weaker euro),” says Francesco Pesole, an FX strategist at ING. 

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of March’s extended decline indicating possible additional areas of technical resistance for Sterling. Click image for closer inspection.

The Pound and GBP/AUD could benefit on Thursday if the BoE picks up the pace at which it lifts Bank Rate, although it remains debatable as to whether the UK economic data have satisfied the BoE’s criteria for doing this and so the risk is of it continuing in unchanged increments of 0.25%.

Such an outcome would likely see Sterling sold against other currencies ahead of the weekend and potentially including the Australian Dollar.

However, the Aussie will also likely be sensitive to the message and implications of the RBA’s latest economic forecasts, which are set for release on Friday.

“This could be a signal that the RBA Board may be thinking about reducing the size of the monthly increases to 25bp in September. We think a 50bp increase is still the most likely choice,” says David Plank, head of Australian economics at ANZ, in reference to the RBA’s language on Tuesday.

“It will be interesting to see what interest rate setting the RBA’s forecasts assume will achieve that inflation and growth outcome,” Plank added.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of 2022 decline indicating possible additional areas of technical resistance for Sterling. Click image for closer inspection.