The Australian Dollar Recovery Against Pound Sterling Begins Now says Lloyds Bank

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- AUD has bottomed out against both USD and GBP says Lloyds.

- GBP/AUD rate declines as Bank of England supports Sterling.

- AUD/USD rises after AU-US interest rate differential tops out.

The Australian Dollar has reached its lowest ebb against Pound Sterling and will soon begin to recover losses from the British currency, according to the latest forecasts from Lloyds Bank

Lloyds, one of the U.K.'s largest domestic lenders, forecasts that the Pound will rise steadily against rivals into year-end, but they also predict a similar performance from the Antipodean currency. 

The net result of the two projections is that the Pound-to-Australian-Dollar rate now looks to have topped out and is forecast to trend lower throughout the rest of 2018 and well into 2019.

Lloyds' forecasts come toward the tail end of a year that has left the Australian Dollar reeling from a series of unfavourable developments onshore as well in the international arena. 

"The Australian Dollar has experienced a significant fall from grace," says Gajan Mahadevan, a currency strategist at Lloyds Bank, referring to the AUD/USD rate. "US-China trade tensions and shifts in the respective interest rate environments are the key factors weighing on the currency pair. Looking ahead, the latter is likely to be of greatest importance." 

The Australian Dollar has shed 9.1% of its value against the U.S. Dollar in 2018 and has fallen 7% against Pound Sterling, taking the Pound-to-Australian-Dollar rate up to 1.86 and the AUD/USD rate down to a multi-year low of 0.7050.

Above: AUD/USD rate shown at daily intervals.

President Donald Trump's "trade war" against China has been the greatest contributor to recent losses but the Aussie's rout was born out of the Reserve Bank of Australia (RBA) and its interest rate policy. 

The RBA held its interest rate at a record low of 1.5% for what is now the 27th consecutive month, citing below-target inflation and a range of factors likely to delay the return of the consumer price index to levels that are closer toward the upper end of the 2% to 3% target band.

Meanwhile, the U.S. Federal Reserve has raised interest rates eight times since the end of 2015, taking the Fed Funds rate range to between 2% and 2.25%. Many economists say it will raise rates so the top end of that range hits 3.25% in 2019.

However, Mahadevan says the Federal Reserve is likely to stop raising its interest rate next year when the Fed Funds reaches 3%, a lower rate than the market currently expects. This could be a game-changer for the Australian Dollar.

Changes in interest rates are only normally made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"We believe there is limited scope for a further widening in Australian-US rate differentials. Moreover, the notable "net short" AUD position may limit the degree to which the currency can depreciate from here. We forecast AUD/USD at 0.74 by end-2018," Mahadevan writes, in Lloyds' latest International Financial Outlook. 

Mahadevan's forecast implies a near-5% rise in the AUD/USD rate is likely before the curtain closes on 2018. However, this will come against a backdrop of a weakening U.S. Dollar and recovering Sterling, which has implications for the Pound-to-Aussie rate. 

Above: Pound-to-Aussie rate shown at daily intervals.

The Bank of England has also raised its interest rate twice inside the last 12 months, taking Bank Rate to 0.75% and reducing the gap between borrowing costs in the U.K. and Australia in the process.

This, alongside the weaker Australian Dollar, already contributed to the 2018 increase in the Pound-to-Aussie rate.

"The flow of UK economic data continues to develop in line with the BoE's outlook. Governor Carney has explicitly states that 'one hike a year' is a 'good rule of thumb'. We are forecasting 25 basis point rises in Bank rate in August 2019 and August 2020, which should support GBP," says Mahedevan. 

The anticipated recovery for Sterling will temper the decline seen in the Pound-to-Australian-Dollar over coming quarters but the pair is still projected to decline by around 3% before the end of 2019. 

Mahadevan forecasts the Pound-to-Aussie rate will finish 2018 at 1.82 and that it will then decline to a trough of 1.79 in September 2019, before rising back to 1.80 in time for year-end.

The Pound-to-Australian-Dollar rate was quoted 0.53% higher for the session at 1.86 Wednesday while the AUD/USD rate was down 0.22% at 0.71.


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