Pound-Australian Dollar hits Fresh 3-Year Highs, Stay Bearish on the Aussie say Julius Baer

Aussie Dollar in 2020

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- GBP/AUD at highest since EU referendum

- Sterling driving majority of gains

- Soft AUD in 2020 likely to keep rally alive

The Pound-to-Australian Dollar exchange rate has on Thursday, December 05. hit a fresh 3-year high at 1.9214, amidst an ongoing rally in Sterling and softness in the Aussie Dollar. And, one investment bank we follow says AUD will likely continue to struggle through the course of 2020.

GBP/AUD has been moving higher since late-July in a steady uptrend, built on expectations that Brexit is heading towards a conclusion. The latest chapter in this story is an expectation that the Conservatives of Boris Johnson will win the December 12. election and swiftly deliver Brexit in early 2020.

However, the gains in GBP/AUD coincide with a softening in the Australian Dollar, which took a hit this week after Australia reported weaker than expected quarterly growth for the third quarter of 2019 (+0.4% vs +0.5%).

GBP AUD at three year best

"Sluggish Q3 gross domestic product data, in particular disappointing consumption and investment, makes a resumption of interest-rate cuts next year likelier," says David Alexander Meier, an economist at Julius Baer, the Swiss investment bank.

According to the economist, while the headline growth figure does not look bad in a world of slowing manufacturing momentum, burdened by the U.S.-China trade tensions, "the details were a bit more worrisome".

The economist cites consumption which rose by only 0.1%, as household demand suffered due to the negative wealth effect of an ongoing slump in the housing market.

It is noted that the decline in consumption comes despite July's tax rebates kicking in, these were intended to spur consumption, but "obviously failed to have a large impact," says Meier.

The Julius Baer economist says the housing troubles also had a negative impact on construction and investments. The data could indeed push the Reserve Bank of Australia (RBA) closer to cutting rates further next year.

The RBA this week opted to keep interest at all-time lows at 0.75%, but in a statement on the decision Governor Lowe opted to strike a more optimistic tone on the outlook than many in the market were anticipating.

This prompted the Aussie Dollar to rally, as expectations for future interest rate cuts were pared back by the market.

But, whether or not the RBA chooses to cut interest rates again in 2020 is actually not likely to alter the Australian Dollar's course lower. Meier says slowing Chinese growth and commodity prices are additional burdens that might weigh on the Australian Dollar going forward.

"Rate cuts or not, we stick to our overall Bearish AUD outlook, as the economy remains burdened by sluggish commodity prices amidst slowing Chinese demand," says Meier.

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