Pound Forecast to Recover Against Australian Dollar, But Buckets of Patience is Required

Some rare gains in the GBP to AUD conversion on Thursday will come as welcome relief to those watching a market that is under sustained selling pressure.

The pound to Australian dollar exchange rate has moved higher on Thursday morning to deliver levels at 1.9395.

Note though that we are only higher than we were at last night's close - the GBP/AUD is still below where it opened 24 hours prior.

This is a tough market for those holding out for a stronger level to buy Aussie dollars as the trend lower, in place since mid-2015 appears to be accelerating.

However, the point of this article is to bring the news that things will likely get better - but you will need to be patient.

Some analysts see the recent sell-off in the pound as only the beginning of something larger, arguing that investors are under-pricing the potential impact on the economy of the U.K exiting the EU.

Analysts at HSBC, Barclays and ING have stated they think the current sell-off is only the ‘tip of the iceberg' for the pound which could see much more dramatic falls in the months leading up to the vote.

"The stage has been set for 4 months of UK political division and business uncertainty over Britain’s place in the EU," says Westpac's Shaun Callow.

The pound is in a lose-lose position according to Callow who is forecasting a move lower in the GBP to AUD conversion towards 1.93:

“Even if polls tilt towards “stay” in the weeks ahead, the pound should remain an underperformer on crosses.”

Given the BOE is highly unlikely to budge from its current wait-and-see, especially with a referendum on the horizon, rate hike bets cannot keep the pound bid either:

“The lack of plausible rate hike risk at the BoE adds to the pressure on the pound. This should see AUD extend gains as far as the GBP 0.5180/0.5200 area, GBP/AUD 1.93.”

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0121▼ -0.2% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9437 - 1.9518
**Independent Specialist	1.984 - 1.992 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Pound to Recover Against Australian Dollar

Beyond the short-term, however, Westpac’s Callow sees the Aussie’s strength waning as familiar pressures once again begin to weigh:

“Beyond this however, there should be sufficient political risk priced into the pound and enough weight on AUD from commodity prices to see the AUD rally falter.”

He forecasts that the GBP/AUD pair will rebound, and spend most of the second half of 2016 above the 2.0000 level.

Monthly GBP/AUD Chart Bearish

Our own analysis suggests that from a technical perspective the long-term monthly chart of GBP/AUD looks especially bearish.

The pair has completed a three wave A-B-C pattern and then rolled over at the highs.

It fell for three months in a row before finding support from a multi-year trend-line where it is currently trading.

This is a very bearish sign, coming after the completion of an A-B-C pattern, and has so far been accurate in indicating more downside.  

Momentum has also been further indicating the probability of more down-side; in addition the MACD momentum indicator has crossed over its signal providing a sell-signal. 

If the pair manages to break clearly below support from the S2 monthly pivot, confirmed by a move under 1.9300, that would provide a strong signal of a continuation down to a low target at 1.8760.

Possible Rebound in Commodities a ‘Spoiler’?

The Australian dollar has found support of late on observations that the commodity market is recovering.

A recent recovery in zinc in particular has shifted sentiment to other major commodity assets. On closer inspection though the recovery in Zinc has revealed itself as more the exception than the rule.

Australia is not a major producer of zinc, but according to the article the rebound in Zinc was due to producers cutting back supply of the metal, to force up prices:

“Zinc has soared more than 20 percent from a six-year low reached in January, after Glencore Plc and Nyrstar NV last year announced production cuts to cope with a slump in prices,” report Bloomberg.

Any hopes that producers of Iron or Steel, of which Australia is one of the biggest, would follow suit, however, seemed to have been dashed after major Aussie producer BHP Billiton said it did not intend to target production to artificially raise prices of iron and steel.

CEO Andrew Mackenzie argued it was not in BHP’s interests to cut production as higher volumes kept costs low:

“Raising supply helps lower costs as BHP increases volumes carried through its network of mines to railroads and ports, Mackenzie said. “It’s by and large free volumes, because they come for almost no cost and dilute our unit costs,” he said. BHP’s cash cost per ton fell to $15.21 in the second half of 2015 from $20.35 a year earlier, the company said."

For this reason, BHP did not see Iron Ore prices going higher, despite a recent surge above 50 dollars per tonne:

“The surge pushing iron ore prices back above $50 a metric ton has failed to shake BHP Billiton Ltd.’s view that prices will stay low as supplies swamp the market and China’s slowdown hurts demand," said the Bloomberg report.