Pound-to-Australian Dollar Week Ahead Forecast: Staying Supported at 2.0

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The pound is rising against the Australian dollar, but gains forecast to be shallow.

The pound to Australian dollar exchange rate (GBP/AUD) fell to the significant support level of 2.0 last week, before finding support and rebounding to 2.0104, where we find it on Monday.

2.0 is proving to be the seminal level in GBP/AUD technical discourse at this time, understandably so owing to its important psychological resonance.

For now buyers are happy to step in here and defend the floor, which leaves us relatively confident the pair should see 2025 out without a material break below here.

The pair is in a recovery sequence at this time, but we're conscious the 21-day exponential moving average at 2.0158 lies just above here; a level above which GBP/AUD has not closed since late November.

With the 21-day pointing lower, it suggests that price action is pointed lower, ensuring something of a pincer zone between the 2.0 horizontal floor and the decline 21-day.

GBP/AUD fell after the Reserve Bank of Australia last week confirmed it had more or less completed the rate cutting cycle, raising expectations that the next move will be an increase in interest rates.

This is fundamentally bullish for AUD.

However, this narrative suffered a setback and the currency weakened on Thursday when the ABS said employment fell 21.3K in November, which was far below the 20K growth the market was teed up for, down from 41.1K in October.

For now, the data is considered to be a blip, and there is no meaningful survey data to suggest a material deterioration in Australia's jobs market, which should keep the RBA on course to raise interest rates next year.

The coming week is packed with developments in the UK that should drive GBP/AUD.

The Bank of England is almost certainly set to lower Bank Rate by 25 basis points on Thursday, meaning the decision itself won't come as a surprise.

Instead, what will be of interest is how the Bank shapes expectations for what happens early next year.

If the Bank says enough to bolster the odds of further cuts, then GBP/AUD can come under more pressure as the divergence in UK and Australian interest rate policy widens:

Ahead of the decision, we will receive labour market and PMI data (Tuesday) and inflation numbers (Wednesday), which will also inform the interest rate story.

Economists look for the UK's unemployment rate to rise to 5.1% when labour market statistics are released Tuesday, confirmation of an ongoing deterioration in the jobs market.

Inflation data on Wednesday should see the ONS announce a headline 3.6% y/y rate, which is well ahead of the Bank's 2.0% target.

If the data comes in ahead of expectations, we would expect pricing for further Bank rate cuts to halt and reverse, helping the pound recover against the Aussie dollar.

The Aussie dollar is meanwhile likely to be primarily concerned with U.S. economic data as this will determine the market tone.

It tends to benefit when sentiment is constructive, meaning Tuesday's U.S. jobs report could well be the event of the week for AUD action.

Here, anything below 50K in the headline non-farm payrolls report should encourage bets for further interest rate cuts at the Federal Reserve, which would bolster stocks and risk-on currencies, of which the AUD is considered.

A strong jobs report could therefore send GBP/AUD down to 2.0, regardless of what happens in the UK this week.