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Those looking to secure Aussie Dollars could be about to see Sterling deliver fresh multi-month highs over coming days.
The Bank of England's latest policy statement has further widened the gulf between the Reserve Bank of Australia's monetary policy stance and that of its developed world peers, a development that potentially heralds further Aussie Dollar weakness over coming months.
The Pound rose sharply against the Australian Dollar during early noon trading Thursday after the Bank of England told markets that it might raise interest rates faster than was previously thought, thanks to stubbornly high inflation and a stronger than expected economic performance from the UK.
Bank of England rate setters voted unanimously to hold the UK's cash rate at 0.50% for the month of February but warned in their accompanying statement that a faster pace of rate hikes will be necessary to return inflation to the 2% target over the two-to-three year forecast horizon.
Markets are now betting a May interest rate rise is likely.
"The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target."
Notably, the bank's latest inflation report put consumer price growth stubbornly above the BoE's 2% target at the end of the forecast horizon, due in large part to a recovery in oil prices and a robust economic performance, which is projected to offset the effect of a recent recovery in Sterling.
Raising interest rates provides the Bank of England the best possible remedy to control higher prices. A side effect of higher interest rates is a stronger currency, hence the rise in Sterling.
"The Pound has bounced back as the Bank of England raised growth forecasts and said it will return to targeting inflation on a 2-year horizon. Today’s Inflation Report was more hawkish than many were expecting, with the bank hinting that it may raise interest rates earlier than originally suggested," says Alex Edwards, head of the corporate desk at OFX. "Sterling looks like it will be the darling of the currency market once again – and hot on the heels of last week’s rally."
Thursday's report also shows the Bank of England upgrading its own forecasts for UK GDP growth in 2018 and 2019, to 1.8% in both years, from 1.6% and 1.7% respectively.
Rising interest rates in the UK will widen the gulf between the Reserve Bank of Australia's monetary policy stance and that of the Bank of England.
This means investors may no longer see such a benefit of borrowing in Sterling and investing in Aussie Dollar denominated cash as the yield advantage in Australia will no longer be as great as it once was. Bad news for the GBP/AUD carry trade.
Thursday's BoE meeting comes just two days after the RBA left its own cash rate unchanged at the current record low of 1.5% for the 18th month running, while signalling that it is in no rush to begin tightening Australian monetary policy.
Traditionally, currencies like the Australian and New Zealand Dollars have enjoyed substantial support from the yields offered by their respective government bonds, which have always been relatively generous when compared with those of other developed economies such as the US and the UK.
However, with central banks becoming increasingly committed to raising interest rates across the G10 sphere, the Australian yield premium could shrink over the coming year if the RBA does not also begin to look at raising interest rates.
This would likely weigh on the Australian Dollar and could continue to support the Pound-to-Australian Dollar exchange rate.
Pound Sterling Live Technical Analysis
As we can see in the above, GBP/AUD now trades towards the 2017 high at 1.7997 where we would expect a notable amount of resistance to be found as traders set sell orders at this point based on the assumption history will repeat and the recovery will die once more.
Closing #GBPAUD LONG @ 1.7950 from 1.7620 entry.— Ashraf Laidi (@alaidi) February 8, 2018
Sticking with other GBP long for now
However, should Sterling crack through this ceiling there could well be clear air above here and Sterling could then start to recapture the ground it lost in the wake of the EU referendum.
Price action in this exchange rate therefore promises to be interesting as those looking to secure Aussie Dollars could be about to see fresh multi-month highs come their way.
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