Australian Dollar Looks to Break Trend Against Sterling

Image © Adobe Stock


The Pound has fallen back from Monday's highs against the Australian Dollar, putting the short-term recovery impulse into question.

The Pound to Australian Dollar (GBPAUD) exchange rate peaked at 2.0151 amidst signs the U.S. was moving forward with tariffs on Mexico and Canada in a move that spooked equity and commodity markets.

Last-minute agreements were reached and confirmed worst-case tariff outcomes would be avoided, allowing markets to snap back.

The AUD recovery triggered a pullback in GBPAUD, taking spot back below 1.20 to 1.9929, and the exchange rate now faces the prospect of recording four consecutive negative daily closes.

The Relative Strength Index (RSI) has retreated to 54 and is pointing lower, confirming near-term momentum has turned to the downside.



The daily chart shows that GBPAUD was rebounding from its early January selloff, but the current setback raises the prospect that the rebound will fade below the late 2024 peak.

If this happens, then a 'lower high' has been printed in a sequence of oscillations that have been taking GBPAUD higher since October.

A 'lower high' would be indicative of a broader change in trend that ends the GBPAUD's longer-term rally. It is too soon to say this is the case, particularly in the context of a global trade war, but it is something to consider for GBPAUD watchers who might be trying to achieve levels at 2.03.

GBP/AUD investment bank consensus forecast for 2025. See the median, mean, highest and lowest targets, giving a highly accurate forecasting resource. Request your copy now.

Interestingly, AUD's advance against the Pound, Euro and other major currencies comes in the same week that China and the U.S. entered a trade war.

The U.S. proceeded with a 10% import tariff, and China answered with a set of targeted import taxes and sanctions.

Commentators suggest China's response was relatively constrained and speaks of a clear desire to avoid escalation.

This is fundamentally important as it eliminates a tail risk of a vicious tit-for-tat trade war that would hurt China and its proxies.

Included in these proxies are Australia, which would come under significant pressure under such circumstances, and we would almost certainly see GBPAUD propelled to new multi-year highs.

"The currencies – apart from CAD – that took the greatest hit from the weekend tariff announcement were SEK, AUD, NZD and EUR. Note also that GBP and CHF were not that heavily affected by the tariff decision," says Tommy von Brömsen, an analyst at Handelsbanken.



While GBPAUD risks via the China channel linger, there is a sense that an interim peace has been reached, which can allow the exchange rate to focus on other issues.

Attention now turns to the Bank of England decision on Thursday and next week's Reserve Bank of Australia decision, where a first 25 basis point cut of an impending cutting cycle is expected.

Analysts think the cut will be a 'hawkish' one, which means the central bank won't commit to a rapid cutting cycle.

This would insulate AUD from significant downside.

By contrast, the GBP is at risk of a 'dovish' rate cut on Thursday, whereby Governor Andrew Bailey commits to the need for further rate cuts, potentially aiming to deliver four over the course of 2025.

This would reflect downgrades to the Bank's growth forecasts and upgrades to unemployment predictions.

With the market prompted to raise expectations for further cuts, Pound Sterling would mechanically adjust lower against the Australian Dollar.

However, the sharp selloff in GBP in the first two weeks of January must be considered, as it suggests the currency has already adjusted to a lower-growth future.

This limits the downside scope for GBP on Thursday.

Add to this the Bank's requirement to upgrade inflation forecasts, which will ultimately limit the 'dovish' tendencies of the Bank's Monetary Policy Committee.

One analyst we follow even suggests the MPC will have to abandon its cutting cycle later in 2025 as rising inflation forces the Bank into a pause, shoring up the GBP outlook and suggesting scope for GBPAUD weakness will be limited.

Theme: GKNEWS