RBA Chief Economist Sarah Hunter. Source: RBA.
The British pound looks due a corrective bounce against the Australian dollar in the days ahead, but beyond that, the decline has further to run.
The pound-to-Australian dollar exchange rate lost the 1.90 floor that had held every decline since June in the opening days of September, and the Aussie has since extended its advance as the market warms to the idea that the Reserve Bank of Australia will raise interest rates as soon as this month.
Rising odds of a September rate hike are bullish for AUD, but the advance looks stretched: GBP/AUD falls to 1.8765 on Tuesday, taking it a full percent beneath its 21-day moving average, a deviation that looks extended.
A deviation of the size tends to mean-revert and the market errs back towards the average, which makes a corrective bounce the likelier next move even inside a chart that points lower.
Above: GBP/AUD daily chart. Image © Pound Sterling Live, chart created with TradingView.
Exchange rates tend to mean-revert to the 21-day when they have run some distance from it, and a gap of that size is wider than the 0.95% that had the pound stretched at the end of August, so the pull higher is stronger now than it was then.
A shallow rebound is possible from here, although if the price of spot simply consolidates the gap with the falling 21-day MA will automatically close.
So this is by no means a bullish call for GBP/AUD price action in the coming days.
Certainly, a rebound to 1.9000 - that graphical horizontal support in the chart - looks too far away to be bothered by a mean-reverting technical rebound or consolidation.
A week ago we looked for a retracement into the 1.8985 to 1.9000 band and expected it to fail there, with a daily close above the trendline near 1.9100 as what would change our mind.
The retracement came, stopped beneath the band, and the failure was more emphatic than we had allowed for. The pound has since lost the 1.9000 floor altogether, which brings the 1.8539 low we named as the next drawn level into play on a multi-week view.
The sequence of lower highs keeps the larger decline intact, and on a multi-week view our Pound to Australian Dollar forecast points at 1.8539.
Hunter Puts a September Hike Back in the Frame
Hawkish comments from RBA Chief Economist Sarah Hunter looks to be behind the most recent rally in the Australian dollar, according to analysts we follow.
Speaking at a convention in Sydney, Hunter said inflation was the RBA Board's top priority and cited the possibility of raising rates, although she cautioned the monthly data are volatile amid market pricing pushing for a September hike.
"AUD/USD reversed earlier falls after hawkish comments from the Reserve Bank of Australia's Chief Economist Sarah Hunter. Hunter said that inflation is the RBA's top priority now and that they won't tolerate an extended period of above-target inflation," says Kristina Clifton, a strategist at Commonwealth Bank of Australia.
Above: Aus two-year yields jump, are back at their peaks, reflecting increased odds of further rate hikes.
The money market is fully priced for a 25bp hike by November.
CBA's Aussie economics team expect a November interest rate increase, but note that the risk is the hike comes sooner in September.
How does that reach the exchange rate? A central bank the market thinks more likely to raise interest rates lifts the yield available on that country's bonds, which draws buyers to its currency, and a stronger Australian dollar pushes this pair lower. Commentary that talks the prospect down does the reverse and lifts it.
That pricing stands between this market and the correction the chart is asking for. A pound looking to mean-revert towards its 21-day needs the Australian dollar to stop being bought, and Hunter has handed the market a reason to keep buying it, which leaves any bounce as the smaller move inside a decline our Pound to Australian Dollar forecast still expects to carry to 1.8539.
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