Australian Dollar Forecast to Commence Next Leg of Strength Against Pound Sterling

The GBP to AUD conversion rate is set to embark on a journey to 1.55 according to our studies following the Bank of England's decision to cut intrest rates and boost asset purchases.

The British Pound to Australian Dollar exchange rate (GBP/AUD) has fallen notably in the wake of the Bank of England's decision to cut interest rates and boost its quantitative easing programme.

The pair fell from a pre-BoE high of 1.7566 down to the 1.7167 we are witnessing at the time of writing.

The move by the Bank, "adds to the global super low interest rate complex and should continue to support demand for higher yielding assets. That implies ongoing GBP underperformance against the AUD, NZD and Asian currencies," says Brian Martin, a technical strategist with ANZ Bank.

The initial fall, in excess of 2%, is the kind of shock that can often trigger a more sustained directional move.

Indeed, the daily chart of GBP/AUD is showing the start of a bearish breakdown from what looks very much like a bearish flag pattern (see chart below).

Flag patterns are continuation patterns, which once they break down indicate much steeper bearish market activity in the future.

For this one, we calculate that the next target is at the 1.7050 lows, however, the full length of the ‘pole’ could well be similar to the move just prior to the formation of the flag.

This move went down from 1.95 to 1.75 -  a move of 20 cents!

Therefore, a similar length pole could go down as far as 1.5500!

At their August meeting officials of the RBA lowered interest rates from 1.75% to 1.50%, and this fuelled the recovery in the GBP/AUD pair, as lower interest rates weighed on AUD.

However, few analysts seem to think this is the start of a new cycle of easing for the RBA, who gave no hint in their monetary policy statement of further cuts being in the pipeline.

Analyst Honglin Joan of Credit Suisse, notes however that there was “little more than an hour’s worth of effect in subduing the currency,” when they cut on August 2.

Inded, Joan notes that the continued flows of capital into AUD is a mixture of both yield potential and stability suggesting that cutting rates alone is not enough to lower the exchange rate.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3094▼ -0.14% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2309 - 2.2401
**Independent Specialist	2.2771 - 2.2863 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Further, Joan and his team sees less than an even chance of a 2016 cut.

Given both these factors the Australian dollar may well evaluate – and indeed Credit Suisse have raised their three month forecasts against the dollar.

“That said, the lack of dovish guidance and enhanced rhetoric around the currency in the statement, in conjunction with the reasons cited above, leads us to believe that the RBA is biased to hold rates steady in the meetings leading up to and including November (barring a further significant deceleration in inflation or global shock),” Summed up Joan.

Given the pound’s own considerable headwinds, and that data so far is showing the fallout from Brexit is roughly as predicted, the fundamental backdrop still points to more weakness in the pair.