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Pound to Australian Dollar Week Ahead Forecast: Potential for More Upside as Chinese Protests Unsettle Markets

  • GBP/AUD looks for 4th weekly gain
  • AUD hit by Chinese protests
  • Govt. to remain committed to zero-Covid policy
  • GBP/AUD can continue higher short-term

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The Pound to Australian Dollar exchange rate (GBP/AUD) has been edging higher for a number of weeks and could extend the advance if global sentiment linked to China deteriorates further.

GBP/AUD has risen to 1.8023 at the time of writing, having completed three weeks of successive advances, and gains bring into view a cluster of technical resistance located in the 1.8130-1.82 region.

The resistance is therefore approximately a further 100 pips higher from current levels and could halt the recent advance.

Indeed, it is slow-going for those waiting for a stronger GBP/AUD as the gains of the past three weeks have yet to fully erase the one-week loss suffered in the week starting October 31.

This was a week in which the Aussie Dollar jumped amidst rumours that Chinese authorities were looking at ways to exit their zero-Covid policy, leading investors to bet a more robust economic recovery in the world's second-largest economy loomed.

The Australian Dollar has a particularly 'high beta' to China and was therefore one of the biggest advancers on the news.

But fast-forward to the end of November and the situation for China, and therefore Australian Dollar 'bulls', has soured.

Surging Covid cases have prompted authorities to tighten restrictions once more, but protests have erupted across China as citizens baulk at the prospect of a winter of lockdowns.

"Hardest hit among G10 currencies has been the Aussie," says John Hardy, Head of FX Strategy at Saxo Bank.

Protests were reported across China over the weekend and continued into Monday amidst signs another round of strict lockdowns beckoned, an unusual occurrence for a typically compliant population.

"The situation in China has upset financial markets in the Asia-Pacific region, with concerns growing about the impact on growth in the world's second-largest economy," reports the BBC's Suranjana Tewari.

Chinese stocks ended lower on Monday with the CSI 300 Index and Hong Kong's Hang Seng Index both down over 1%, the onshore yuan weakened 0.5% against the dollar, having plunged more than 1% at the open, the most since May.

"Unprecedented waves of protest in China have caused ripples of unease across financial markets, as worries mount about repercussions for the world’s second-largest economy. As demonstrations spread across the country from Beijing to Xinjiang and Shanghai, reflecting rising anger about the zero-Covid policy, a sustained recovery in demand across the vast country appears even further away," says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

GBP/AUD daily

Above: GBP/AUD at daily intervals. Consider setting a free FX rate alert here to better time your payment requirements.

Chinese demand for Australian exports, most notably raw materials, has been a strong component of Australian economic strength over the past two decades which has in turn provided a fundamental underpinning to the AUD.

Despite the protests, authorities are highly unlikely to ease restrictions meaning the economy faces another winter of underperformance.

China's state-run Xinhua news agency on Monday defended the Covid Zero strategy, insisting it is "science-based and effective," even though China's control measures are facing "unprecedented pressure."

As the China 'reopening' trade soured through November we can observe a steady recovery in GBP/AUD that has taken spot back to 1.8020 by the time of writing, ensuring bank transfer rates for Aussie buyers are at approximately 1.7522 and those at competitive payment specialists at 1.7973.

Given the evolving fundamentals, GBP/AUD remains preferred short-term.

Looking at the Australian economic and event calendar reveals a sparse landscape with nothing available to drive the domestic currency.

This truly is a week in which the global picture matters, and with the situation in China likely to dominate the news agenda sentiment towards the Australian Dollar will likely be poor.

"This is all dashing hopes of an easing of restrictions, given that Xi JinPing will not want to look like he's backing down in the face of protests," says Streeter.