Pound / Australian Dollar Rate Steadying after U.S. Yields Stall AUD/USD Rally

• GBP/AUD steadier after AUD/USD recovery stalls 
• U.S. yields stifling AUD/USD rebound short-term
• Supports GBP/AUD near 1.73 but upside limited
• BoE uncertainties constrain as UK CPI data eyed  
• RBA policy headwind fading, AU jobs data ahead 

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The Pound to Australian Dollar exchange rate has stabilised near to recent multi-year lows and could attempt a further partial recovery this week if U.S. bond yields and inflation developments lead AUD/USD to retreat further from early April's highs over the coming days.

Australia’s Dollar had extended a two-month rally against Sterling, the U.S. Dollar and other currencies last week when the Reserve Bank of Australia (RBA) appeared to edge another step closer to raising its cash rate for the first time since long before the onset of the coronavirus crisis. 

But the AUD/USD rally was halted by a deepening rout in the U.S. bond market and resulting surge for U.S. yields that has lifted the U.S. Dollar back onto its front foot and helped bring something of a temporary end to what was previously a lengthy slide in GBP/AUD.

“The jump in Australian yields was accompanied by a surge in AUD/USD, from 0.7540 pre-RBA statement to as high as 0.7661 later in the day. Since then however, it has been virtually one-way traffic lower for the Aussie,” says Sean Callow, a senior FX strategist at Westpac.

“We expect a broadly resilient US$ near term, which should help cap the Aussie around 0.7615 in the week ahead, with the negative mood of recent sessions potentially opening up a test of support near 0.7400,” Callow also said Monday.

Above: Pound to Australian Dollar rate shown at daily intervals with selected moving-averages and alongside AUD/USD.

Until now the RBA’s guidance had suggested it would likely be some time in 2023 before its cash rate begins to rise from a pandemic-inspired low of 0.10% but last week’s statement opened the door to an interest rate rise that could come as soon as June.

But this has done little to offset the pressure from U.S. bond yields after minutes of the March Federal Reserve meeting suggested last week that  financial markets might still be underappreciating how quickly the bank could lift U.S. interest rates this year, burdening AUD/USD in turn.

“AUD/USD has traded back to previous resistance around 0.7420, and though seeing some buying off that level during the local day, spot risks lower on further squeezing of interest rate differentials, led from the US side,” says Patrick Bennett, Asia head of FX strategy at CIBC Capital Markets. 

“AUD still shows a positive yield over the USD, both nominal and more so on real measures, though momentum has been with the USD buying. The next major downside support is seen at 0.7370-80,” Bennett wrote in a Monday market commentary. 

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The Pound to Australian Dollar rate may be likely to remain buoyant at 1.73 or higher this week if AUD/USD remains suppressed below last week’s highs as it tends to closely reflect the relative performance of AUD/USD and its Sterling counterpart GBP/USD.

But upside for GBP/AUD is potentially limited by uncertainty about the outlook for Bank of England interest rate policy after the BoE cited an inflation-induced squeeze on incomes in March as a prospective partial equivalent for additional increases in Bank Rate later this year. 

“CPI inflation for March is expected to step up from 6.2%/yr to 6.7%/yr (Wednesday),” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

“GBP/USD is likely to trade around 1.3000 with a downward bias care of a stronger USD this week,” Capurso also said on Monday. 

The BoE has raised Bank Rate three times since December but stoked doubt about whether it will be lifted further in the short-term, which could potentially prevent Sterling from benefiting if this Wednesday’s UK inflation data surprises on the upside of market expectations. 

Above: Pound to Australian Dollar rate shown at weekly intervals with Fibonacci retracements of 2017 uptrend indicating possible medium-term areas of technical support for Sterling. Shown alongside selected moving-averages and spread - or gap - between 02-year UK and Australian bond yields. 

With a BoE policy response less than assured any further uplift in the inflation might be a neutral-to-negative influence on the Pound to Australian Dollar rate, which will also potentially face headwinds on Thursday when Australia’s latest jobs figures are released.

“We expect unemployment to fall to 3.8% in March, which would be the lowest in the survey’s history since 1978. We see another solid employment gain of 50k,” says Catherine Birch, an economist at ANZ.

Australia’s labour market was already close to record levels of employment before March, leading the RBA to observe last month “a further pick-up in aggregate wages growth and broader measures of labour costs is in prospect.” 

Improved wage growth has long been a prerequisite for any eventual increase in the RBA’s benchmark interest rate and any evidence of it in Thursday’s employment data would hardly do anything to harm the Australian Dollar and could even act as a headwind for GBP/AUD.

Consensus among economists suggests a further 30k jobs were either created or recovered from the coronavirus in Australia last month, which is expected to have pushed the unemployment rate down to 3.9% and its lowest since before the 2008 financial crisis. 

Above: AUD/USD shown at daily intervals with Fibonacci retracements of May 2021 decline indicating possible medium-term areas of technical resistance to a further recovery. Shown alongside selected moving-averages and spread - or gap - between 02-year Australian and U.S. bond yields.