Pound / Australian Dollar Rate at Risk of Slide to 1.76 and Below
- Written by: James Skinner and Gary Howes
- GBP/AUD recovers 1.78 as AUD/USD rally ebbs
- But vulnerability remains with conflict in Europe
- May see GBP/AUD extend slide to 1.76 or below
- RBA speech, commodities in focus for AUD/USD
- Broader Europe FX trend key influence for GBP
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The Pound to Australian Dollar rate fell heavily to open the new week and could be seen trading down to 1.76 and below over the coming days if Russia's war on Ukraine continues to drive a divergence between European and commodity-linked currencies.
Australia’s Dollar rallied sharply against all major counterparts during the recent fortnight but cooled its heels notably in opening session of the new week after headlines suggested scope for a ceasefire between Russia and Ukraine which were widely cited as supporting risk assets and dampening market appetite for commodities.
The Pound to Australian Dollar exchange rate rose back above the 1.78 handle in the ensuing rally after Reuters reported that Russia’s invading army would cease its attacks on Ukraine if the country’s government meets a list of Kremlin demands.
Kremlin spokesman Dimitry Peskov said Russia would withdraw forces if Ukraine cease military action, change its constitution to enshrine neutrality, acknowledged Crimea as Russian territory, and recognise the separatist republics of Donetsk and Lugansk as independent states.
"We have also spoken about how they should recognise that Crimea is Russian territory and that they need to recognise that Donetsk and Lugansk are independent states. And that’s it. It will stop in a moment," said Peskov.
The rub is that Moscow’s list is similar to the itinerary of demands it has made ever since first parking its military along Ukraine’s borders, and acquiescence to it would amount to a capitulation that has already been rejected multiple times in Kyiv.
"Putting aside the war’s social and political consequences, if the net impact of the war is higher energy prices, AUD/USD will benefit because Australia is a large energy exporter," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia
“AUD/USD could meet our end-June forecast of 0.76 early,” Capurso and colleagues also said.
Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of 2021 rally indicating possible areas of technical support.
- GBP to AUD reference rates at publication:
Spot: 1.8000 - High street bank rates (indicative band): 1.7368-1.7450
- Payment specialist rates (indicative band): 1.7840-1.7910
- Find out about specialist rates, here
- Set up an exchange rate alert, here
With parts of the market appearing to buy Monday’s ceasefire headlines, Sterling and other European currencies could be vulnerable to a disappointment heading toward the midweek milestone, which would mean there's a risk of further declines in GBP/AUD.
“Although AUD/USD may have retreated from overnight highs at 0.7441 the strong breach of the 200day MAV, currently 0.7323, underlines a continued positive bias,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets.
GBP/AUD would trade as down to 1.76 or below if the above factors lead the main Aussie exchange rate AUD/USD to make another attempt at rising above 0.74 and if in the interim, its Sterling equivalent GBP/USD remains under pressure around 1.3120 or below.
Although commodity prices have likely served as an enticement and major driver of Australian Dollar exchange rates of late, there are also other factors that may be driving its performance too including tragic floods across the east of the country.
"The greater Sydney area is in the middle of intense rains at the moment, with reports of major city streets underwater. Because Australian P&C insurers typically obtain reinsurance from abroad, bursts in claims like this can lead to inflows into the Australian dollar," says Stephen Gallo, European head of FX strategy at BMO Capital Markets.
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In addition, there are two scheduled public engagements for Reserve Bank of Australia Governor Philip Lowe this week.
“The local event that may influence AUD/USD is a speech by RBA governor Lowe at the Financial Review’s Business Summit on Wednesday. While the title of the speech is not yet known, Lowe could use the opportunity to talk about the latest wage report and how that fits in his ‘patience’ view,” CBA’s Capurso said on Monday.
The Australian Dollar would be likely to listen closely to Tuesday and Wednesday's speeches for inidcations of if there’s any prospect of the RBA eventually meeting financial market expectations for an initial increase in its benchmark interest rate this June.
So far all of the governor and RBA’s statements have indicated that this would be highly unlikely, although that hasn’t stopped the Aussie from reversing a year-long underperformance to become the top performer of 2022 in the G10 segment of major currencies.
While speeches from RBA Governor Lowe are important for the Aussie, the wider market is likely to remain preoccupied with developments relating to Ukraine, which have so far taken a heavy toll on Sterling and especially GBP/AUD.
Above: AUD/USD shown at weekly intervals with major moving-averages and Fibonacci retracements of February 2021 decline indicating prospective areas of technical resistance to a further Aussie Dollar recovery.
