Pound-Australian Dollar Forecast: Near-Term Supported, Aided by Market Caution

- GBP/AUD shorter-term momentum constructive
- AUD trending lower in sympathy with softer markets
- Aussie inflation data is main domestic event
- But AUD left without a solid floor says ING

Australian Dollar forecast vs. the Pound

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  • GBP/AUD spot rate at publication: 1.7708
  • Bank transfer rates (indicative guide): 1.7088-1.7200
  • FX specialist transfer rates (indicative): 1.7500- 1.7570
  • More information on FX specialist rates, here

The Pound-to-Australian Dollar exchange rate is softer at the start of the new week, easing by 0.08% to 1.7706.

Despite the decline in GBP/AUD, the Pound still remains preferred against the Australian Dollar in the short-term, with momentum studies of the chart suggesting the rally that started on January 07 can persist.

A simple study of where momentum lies can be instructive and we note GBP/AUD has moved above the 21-day moving average, which is now located at 1.7639 (blue line in chart below):

Pound to Australian Dollar

Another important reading - the Relative Strength Index (lower pane in the above) - confirms momentum is still positive at 50.80, but it does appear to be fading.

Both readings advocate for near-term gains, even if there is some signs that the move higher is slowing.

Indeed, the GBP/AUD exchange rate must break above the 50-day moving average to convince that a more sustainable uptrend is establishing. This level is currently located around 1.7825.

Any reading that looks beyond the coming days and to the coming weeks does however suggest the Aussie Dollar might still be preferred and that a multi-month downtrend in GBP/AUD could ultimately restart should the fundamentals realign.

Fundamentals are currently unfavourable to the Australian currency given that the strong market rally of late 2020 and the early days of 2021 appears to have paused amidst a combination of covid-19 worries and concerns that the global vaccination programme is suffering a slow start.

Furthermore, there is a great deal of talk amongst the analyst community about stock markets starting to look frothy in some sectors, and therefore risks of a more sustained correction lower are growing.

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The Australian Dollar lost ground last week as it struggled in an environment of 'risk off' sentiment amongst global investors, confirming the currency's tie to broader sentiment and underpinning the Aussie Dollar's vulnerability to soft market conditions.

Risks to the outlook remain elevated and holding a strong conviction for further advances in stocks and the British Pound is difficult owing to uncertainties regarding the covid-19 pandemic, and this is being reflected via a pullback in markets as the London session progresses.

"Vaccinations are slower than what we’d expected in virtually all large countries and even in countries where it’s been quicker, eg the U.K., the one dose first strategy means that full protection will be slower to materialise. It also doesn’t seem to be the case that just vaccinating the vulnerable will be enough to lift most restrictions as I’d expected," says Jim Reid, Research Strategist at Deutsche Bank.

"This is partly due to increasing concerns around mutations from various parts of the world," he adds.

The UK is reportedly considering stricter border controls for all travellers this week while U.S. President Joe Biden's administration on Sunday said flights from South Africa would be banned. Meanwhile, France and other European nations are looking to tighten restrictions once more, citing the emergence of the UK covid variant.

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"Until scientists rule that each will be covered by the current vaccines there will likely be reluctance to lift restrictions. So it now seems we will be constantly worried about mutations until covid has been largely eradicated even if none of them ever evade vaccines. So although I still think there’s going to be a huge surge of economic activity by the summer, there is probably a bit more doubt in my mind now than there was back in November," adds Reid.

This week, the key Australian data release to monitor is the inflation report for the fourth quarter (Wednesday, 00:30 GMT), which should feed into expectations for future Reserve Bank of Australia (RBA) policy decisions.

Consensus is looking for a reading of 0.7%, but on investment bank we follow see the impact of domestic and external virus-related factors as having pushed the figure to 0.5%.

Such a disappointment would likely weigh on the Aussie Dollar.

"This may put some short-term pressure on the AUD next week as it would fuel expectations of an even longer period of low rates in Australia," says Francesco Pesole, foreign exchange strategist at ING.

However, the strategist doubts that would be enough to trigger speculation of more easing by the RBA, which he says appears to be out of firepower, considering negative rates have been ruled out.

"Some cooling off in the risk rally may leave AUD without a solid floor," says Pesole.

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