Pound to Australian Dollar Rate Stymied Below 1.77 and Eyeing Retest of 1.75

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The Pound to Australian Dollar rate has been volatile but may now struggle to rise back above the very nearby 1.7662 level and could be most likely to ebb toward 1.7522 if the U.S. Dollar retreats from Tuesday’s highs in the days ahead. 

Australia’s Dollar tumbled before most other currencies on Tuesday following the Reserve Bank of Australia (RBA) policy decision for July, which saw the cash rate lifted by 0.5% for a second time, taking it up to 1.35% for the time being.

Tuesday’s decision was widely expected by the market and was followed by losses for the Australian Dollar that may have had to do with the accompanying statement, which lacked the ‘hawkish’ rhetoric and sense of urgency displayed by some other central banks.

“Interest rate futures had virtually fully priced‑in a 50bps hike and there were no indications the RBA is about to dial‑up hawkishness. Instead, the RBA reiterated it expects inflation to peak later this year and then decline back towards the 2‑3% range next year. The language suggests the RBA is unlikely to run hard against high near‑term inflation,” says Elias Haddad, a senior FX strategist at Commonwealth Bank of Australia. 

Above: Pound to Australian Dollar rate shown at hourly intervals alongside AUD/USD. 

The statement was in keeping with sentiments recently expressed by Governor Philip Lowe but came against a backdrop of hawkish expectations, implied measures of which suggest that investors are looking for a sharp climb in the cash rate this year.

It’s possible the RBA’s patient and measured approach to its monetary policy was the catalyst for Tuesday’s Australian Dollar losses, although it’s also almost certainly the case that losses were added to by price action in European currency markets on Tuesday.

“Today’s move lower in EUR/USD (thanks to Norway’s gas strikes, new highs in German electricity prices) is just a warning sign as to what might materialise later this month as Nord Stream 1 could be shut off,” says Jordan Rochester, a strategist at Nomura. 

The Nomura team has stuck for months now to a conviction view that favours a fall by the Euro toward parity and below over the course of this year and that view appeared to be playing out on Tuesday when the single currency set fell to its lowest level since 2002.

Above: Euro to Dollar rate shown at monthly intervals alongside AUD/USD. Click image for closer inspection. 

This ame amid widespread discussion among analysts about the economic risks posed by rallying natural gas prices with falling levels of Russian supply and strike action in Norway both cited as contributors to the latest increases.

“Germany’s plan if the gas crisis deteriorates is to move from phase 2 to phase 3 of its rationing scheme. Industry would see its gas supplies rationed. This risks a significant amount of disruption to manufacturing and German exports, something that even COVID-19 lockdowns failed to achieve. This would significantly hit the euro area’s trade balance and also lead to widespread shortages pushing up prices,” Rochester said on Tuesday.

These developments will also have knock-on implications for other economies and currencies too but that didn’t stop the European single currency from becoming the biggest faller among majors until shortly after Tuesday’s North American open, which saw the U.S. Dollar soften.

Earlier price action pushed the main Australian exchange rate, AUD/USD, back to an important technical support on the charts, which appeared to frustrate its declines, but with the U.S. Dollar softening since the GBP/AUD pair could also now be likely to retreat further from its intraday highs. 

Above: Pound to Australian Dollar rate shown at 4-hour intervals with Fibonacci retracements of June rally indicating possible areas of technical support for Sterling. Click image for closer inspection. 

“The global growth outlook is deteriorating markedly as central banks raise rates super aggressively, the Fed enacts record QT, and China maintains its zero-Covid policy. Weakness in iron ore and met coal adds to that theme so the A$ should remain capped by the 0.6910/50 region,” says Sean Callow, a senior currency strategist at Westpac. 

“The 0.6760/65 level will be an important support level, however, being the 50% retracement of the March 2020 low to Feb 2021 high plus a trend line off the march and Dec 2021 lows,” Callow adds in Tuesday remarks.

The Pound to Australian Dollar rate tends to closely reflect the relative performances of Sterling and the Australian Dollar when each currency is measured against the U.S. Dollar and could be most likely to trade within a 1.7762 to 1.7522 range through the days ahead.

That’s according to the author’s own model, which uses currencies’ sensitivities to the direction of the Dollar and a process of cross-currency triangulation to estimate where non-Dollar exchange rates would be likely to trade as the Dollar itself rises and falls. 

Above: Pound to Australian Dollar rate shown at daily intervals alongside AUD/USD.