GBP/AUD: Finding Feet, Recovering Poise

• GBP/AUD finding support around 1.7374 on charts
• May have scope for attempted recovery short-term 
• If Fed breaks USD's fall or BoE surprises hawkishly

Image © ArchivesACT, Reproduced under CC Licensing, Editorial, Non-Commercial

The Pound to Australian Dollar exchange rate (GBP/AUD) has been hobbled in recent trade but upside risks for the U.S. Dollar and a forthcoming Bank of England (BoE) interest rate decision could help to lift it back onto its feet for a time over the coming days.

A lacklustre show from Sterling made it easy pickings for an outperforming Australian Dollar last week after a volley of sour data from the UK economy left the Pound at a disadvantage to an antipodean currency that rallied broadly amid rising market expectations for Australian interest rates.

With inflation far surpassing the Reserve Bank of Australia's (RBA) eight percent forecast for the year to December last week, prices in interest rate derivative markets now suggest a risk of the cash rate being lifted by as much as half a percentage point on February 07.

"In the lead-up AUD exposures will be impacted by risk and sentiment in markets, where the tone will predominantly be driven by the reaction to the FOMC meeting (2 Feb 06:00 AEDT), as well as Friday’s US non-farm payrolls (4 Feb 00:30 AEDT)," says Chris Weston, chief market analyst at Pepperstone.

"However, getting set for the RBA meeting is an increasing factor, especially if trading AUD through the crosses – AUDNZD, GBPAUD and AUDCAD," he adds.

Above: Pound to Australian Dollar rate with Fibonacci retracements of late September rallies indicating possible areas of technical support for Sterling while selected moving averages offer technical resistance. Click image for closer inspection.

With appetite for the Pound dampened by glum UK business surveys, falling producer price inflation and a record increase in public borrowing for December, last week's Australian Dollar gains were enough to make GBP/AUD the biggest faller of the Sterling pairs. 

But with GBP/AUD steadying above a Fibonacci support level at 1.7374 on the charts late last week, it could have scope for a tepid recovery this week if the proximity of Wednesday's Federal Reserve (Fed) decision discourages would-be sellers of the U.S. Dollar.

GBP/AUD tends to rise when AUD/USD falls and vice versa, which means Sterling would likely struggle if AUD/USD continues to rally.

"It would take a very explicit message from Chair Powell that more rate hikes than priced will be required to spark a rates-driven rebound for the dollar, especially with the ECB set to remain hawkish," says Lee Hardman, a senior currency analyst at MUFG.

"There is a greater risk of a dovish outcome from the BoE with the market positioned for 50bps," he adds. 

Above: AUD/USD shown at weekly intervals with selected moving averages and Fibonacci retracements of 2021 fall indicating possible areas of technical resistance, and shown alongside GBP/AUD. Click image for closer inspection.  To optimise the timing of international payments you could consider setting a free FX rate alert here.

But Sterling could have difficulty if economists are right to anticipate only a reluctant increase in interest rates from the BoE on Thursday. 

"The update projections are likely to paint a less gloomy picture compared to the November central forecast, largely on the back of a decline in energy prices, a less stringent rate-conditioning path, and a more constructive external growth backdrop," says Abbas Khan, an economist at Barclays. 

"We expect a still divided MPC to deliver a 50bp hike next week, but to signal its intention to step-down the hiking pace to 25bp in coming meetings to reduce the risk of over-tightening," Khan and colleagues write in a Friday research briefing. 

Thursday's decision could help the Pound if upgrades to economic forecasts and stubbornly high inflation in the services sector lead the Monetary Policy Committee to maintain hawkish guidance about the outlook for Bank Rate.

But the market pessimism about the UK economy and recent outperformance of the Australian Dollar could mean Sterling will face an uphill struggle to sustain any rebound attempted in the week ahead.