Image © RBA.
The British pound looks set to extend its recovery against the Australian dollar in the coming week, with any lift for the Aussie from Tuesday's RBA hike likely to fade.
The Pound to Australian Dollar exchange rate has climbed back above its 21-day moving average after buyers defended September's lows once again, and the recovery has room to extend this week as rising market volatility weighs on the Aussie.
The Reserve Bank of Australia is widely expected to raise interest rates on Tuesday, and a hawkish message could hand the Aussie a lift, though the move is so fully priced that the boost would likely prove brief.
Further out, the flat 100-day moving average - the red line in the below chart - sits across the path of the recovery and looks set to cap it:
GBP/AUD daily chart. Image © Pound Sterling Live, chart created with TradingView.
GBP/AUD trades at 1.8848 at the start of the new week, having bounced from graphical horizontal support at 1.8730, a floor that has stopped every decline this month.
The 21-day - the blue line - has fallen since late August and is now flattening out. The market's move back above it removes the short-term downside signal that underpinned our call a week ago.
The 100-day has barely moved since August and sits near 1.8990, where it appears to be marking the centre of the range, so a rebound towards it is plausible while a clean break above 1.9000 looks like a job for another week.
We expect the recovery to extend towards 1.8990-1.9000 in the days ahead, with the RBA a source of short-lived Aussie strength. A daily close beneath 1.8730 would undermine our Pound to Australian Dollar forecast and put the May low at 1.8540 back in view.
Our call a week ago was that the downtrend was back in charge, with losses towards 1.8535 expected by mid-October. The pair held 1.8730 again and has since regained its 21-day, so the call has not worked this week and the October objective is on hold while the floor stands.
RBA Guidance Matters More Than the Hike
The RBA is expected to lift the cash rate by 25 basis points to 4.60% on Tuesday after pausing at its previous two meetings, and cash rate futures imply a 90% probability of the move.
What happens to a currency when a hike is fully priced? The decision itself carries little news, so the exchange rate takes its lead from what the central bank says about the next move. Guidance that bolsters bets on further tightening can push the Aussie higher, while any pushback would see it fall.
Markets price around 65 basis points of RBA tightening over the next twelve months, and the minutes of the 11 August meeting showed several members judged it "quite possible that the upside risks to the inflation forecast would crystallise."
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistAUD/GBP will "only receive a temporary boost if the RBA deliver a hawkish hike," say strategists at Commonwealth Bank in their Weekly FX Strategy note of 28 September.
Wednesday's August consumer price index could matter more to rate expectations than the decision. An inflation reading above consensus would support the Aussie and push GBP/AUD lower, and a softer number would do the reverse.
Volatility Weighs on the Aussie
The Australian dollar was the worst-performing G10 currency last week as a global bond selloff lifted currency volatility and investors unwound carry trades, in which the Aussie is a favoured target. That weakness came even as Australia added 39,500 jobs in August, well ahead of the 20,000 expected, although unemployment rose to 4.6%.
Monday's slide in stocks and bonds, which followed the White House's rejection of Tehran's latest offer on Hormuz shipping, leaves markets on edge, and a nervous market keeps the high-beta Aussie under pressure.
Sterling carries its own risk into the 28 October Budget, which limits how far the pound can run. With the RBA hike in the price and volatility working against the Aussie, that is consistent with our Pound to Australian Dollar forecast of a recovery towards the 100-day this week.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
