Pound-Australian Dollar Rate Range Trades as Santa Offers Coronavirus and Coal for Christmas

- GBP/AUD trading 1.76-to-1.79 range as USD dominates. 
- Holiday week marred by risk aversion over new virus strain. 
- Leaving currencies with coal, or coronavirus for Christmas.
- Brexit, virus leaves GBP vulnerable to underperformance. 

Above: Woman Wearing a Mask Crossing Road Near Flinders Street Station in Melbourne. Image © Adobe Images

  • GBP/AUD spot rate at time of publication: 1.7797
  • Bank transfer rate (indicative guide): 1.7158-1.7282
  • FX specialist providers (indicative guide): 1.7513-1.7656
  • More information on FX specialist rates here

The Pound-Australian Dollar rate recovered its footing as the U.S. Dollar dominated in risk-averse holiday trade Tuesday, although lingering Brexit and coronavirus risks leave Sterling susceptible to underperformance and could be enough to ensure a continued range-trade throughout the week.

Sterling was a fraction higher against the Australian Dollar and trading near the midpoint of a likely 1.76-to-1.79 range, although it may struggle to advance by much from prevailing levels in the absence of concrete progress in negotiating a smooth exit from the Brexit transition period at month-end. 

"We continue to believe that a last minute trade deal will be reached but the risk of a No Deal is now elevated with time fast running out to reach compromises," says Lee Hardman, a currency analyst at MUFG. "Even if a trade is reached, upside potential for the pound will now be dampened by recent negative COVID developments in the UK. Economic disruption from the new tougher Tier 4 restrictions in response to the new COVID strain has been reinforced by barriers put in place by other countries in an attempt to stop the spread."

Meanwhile, the Aussie was sighted near the bottom of the major currency pile for a second day ahead of the festive break as reduced volumes, the resulting impaired liquidity and ongoing uncertainties about the new and more infectious strain of coronavirus thought to be spreading in Britain lifted the U.S. Dollar. 

America's Dollar has been the only real winner from the latest twist in the coronavirus chronicle, having advanced against all major currencies for three days on the bounce and enough so to prompt the Aussie to overlook on Tuesday another solid retail sales report from down under.  

Above: Australian Dollar performance against major currencies on Tuesday (left) and U.S. Dollar performance (right).

"The multi‑year high in consumer confidence points to further improvement in retail trade over the coming months," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "Technically, AUD/USD and NZD/USD remain vulnerable to a short‑term pullback towards 0.7310 and 0.6880, respectively (50% retracement of their November/December uptrend). A more pronounced correction in iron ore prices will further weigh on AUD." 

Retail sales rose by an annualised 7.1% down under in October when consensus looked for only a 2.1% increase, meaning they were 7.1% higher than at the same point in October 2019 when the global economy was yet to be disrupted by the coronavirus. The figures are another reminder of the Aussie's near best-in-class economic credentials, which are buttressed by a comparatively lower debt-to-GDP ratio than those prevailing elsewhere in the developed world and a hefty exposure to China's recovery.

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But with parts of Australia having seen coronavirus-related restrictions tightened again ahead of the festive break as the world scrambles to effectively quarantine Britain in response to a new and more infectious strain of the virus, the Aussie Dollar barely batted an eyelid at the numbers. 

"The ability of vaccines to cope with COVID-19 mutations is one of the biggest single headline risks to monitor between now and mid-January. It's likely that the NOK, GBP, AUD, and NZD would be the most vulnerable G10 currencies to a negative development in this regard," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "Barring some type of dramatic shift over the next 24 hours (or less), it's now difficult to see how even a 'skinny' UK/EU-27 arrangement can be ratified by both sides in time for midnight on December 31. We are of course in the realm of high, European politics - so last minute, unforeseen tricks and loopholes are always possibilities. But the chances of this happening over the said time period are clearly diminishing."

Above: GBP/AUD rate shown at hourly intervals alongside AUD/USD (orange line, left axis).

"We expect GBP weakness to persist as governments focus their time on dealing with the latest virus disruption and away from still very fragmented trade negotiations," says Juan Manuel Herrera, a strategist at Scotiabank. "AUDCAD gains appear to be stalling near the top of the Oct-Dec bull channel and near the 0.97 level that we expected to provide firmer resistance to the AUD’s overall advance. Still, the charts reflect positive trend strength signals across all time frames and our confidence in the cross’ advance stalling above 0.97 is not especially high at this point. We think near-term losses are likely to be confined to the low 0.96 area. Major support comes in near 0.9520." 

Uncertainty abounds over exactly what the new strain will mean for the UK and global economies beyond the short-term, although for the time being both new and existing forms of the virus have prompted much of Europe to prolong economically-damaging 'lockdown' measures that now look set to remain in force long after the New Year. 

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UK health secretary Matt Hancock hinted at the weekend that 'lockdown' could remain the government's prescription until a vaccine is available nationwide while Prime Minister Boris Johnson said on Monday that "we can all look forward to a very different world by Easter."

Johnson previously said a similar thing about Christmas, as recently as October, although his latest remarks indicated the government could continue with its curbs on activity for months after the New Year in what would be an unanticipated turn of events for markets.

Above: GBP/AUD rate shown at daily intervals alongside AUD/USD (orange line, left axis).

Investors have so-far anticipated that a vaccine rollout will lead to reduced disruption for all major economies early next year.

"Initially, this has been spun as a UK story, but our fear is that this could well be a new global risk, given that it is unlikely that this strain of the virus is contained in the UK if it has slipped out at all, which some reports suggest it has," says John Hardy, head of FX strategy at Saxo Bank. "We need to see AUDUSD remaining above 0.7400 to maintain the upside focus, while something more like 0.7250 is needed to start to really signal significant breakdown risk." 

Australia's Dollar was holding above the 0.75 handle against the greenback on Tuesday while the main Sterling exchange rate had climbed back to 1.34 after having been as low as 1.3250 in Monday trading, leaving the Pound-to-Aussie rate quoted near to 1.78. GBP/AUD always closely reflects relative price action in GBP/USD and AUD/USD. 

However, and with the Brexit negotiations unresolved and the clock still ticking, Sterling could be more susceptible to weakness over the coming days than its Australian counterpart. The Pound-to-Australian Dollar rate would fall back to around 1.76 handle if Brexit-related selling pushes GBP/USD back to Monday's lows over the coming days and Australia's Dollar remains supported above 0.75. Any signs of success in trade negotiations with the EU could lift GBP/AUD back to 1.79 or slightly above if they're successful in taking GBP/USD back to the 1.35 handle that it held successfully into last weekend, and AUD/USD at same time succeeds in holding above 0.75.

"FX investors can probably foresee a situation in which no formal deal is reached by December 31 and a temporary arrangement is agreed that maintains 100% tariff-free trade. But there are two key risks to this scenario: the first is the government's preoccupation with managing COVID-19 and its economic impact (the appetite for an extension on the UK side appears very low). The second risk is that a temporary arrangement may require one or two big concessions from either side to occur first, so that talks can continue after December 31. Such concessions are certainly possible, but at the moment they don't appear particularly likely," BMO's Gallo says.

Above: AUD/USD rate shown at hourly intervals alongside GBP/USD (orange line, left axis).