AUD/USD’s break above 0.74 bearish for GBP/AUDSustained advance could push GBP/AUD to 1.7650Deeper loss possible further out on BoE uncertainty

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The Australian Dollar remained an outperformer early in the new week when a break higher in AUD/USD pushed GBP/AUD back to one-year lows while cultivating the risk of a more protracted decline to 1.7650 or below over the coming days.

Australia’s Dollar rose broadly on Tuesday having been outperformed by only its Kiwi counterpart as the AUD/USD exchange rate probed above the 0.74 handle in a further sign that the more-than year-long downtrend may be in the process of reversing.

Tuesday’s price action extended a six-week Australian Dollar rally that has lifted AUD/USD more than six percent since late January and weighed heavily on GBP/AUD, which tends to have a negative correlation with AUD/USD and could have further to fall over the coming days.

“Australian government bond yields followed their US counterparts higher. In our view, rising global interest rates, combined with high commodity prices and AUD’s material undervaluation, can underpin AUD/USD this week and beyond,” says Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia.

Above: AUD/USD shown at weekly intervals with Fibonacci retracements of November 2021, June 2021 and February 2021 downtrends indicating possible areas of technical resistance to a further Aussie Dollar recovery. Includes selected moving-averages. Click image for closer inspection.

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Australia’s Dollar was undeterred from its rally when Reserve Bank of Australia Governor Philip Lowe said at the Walkley Awards for Business Journalism 2021 that the RBA's cash rate is unlikely to rise from its current 0.10% record low until after workers' pay packets and overall inflation rates have picked up further in Australia.

"RBA Governor Lowe delivered no fresh information following his comments. Lowe reiterated the RBA will not respond until there is evidence of widespread price pressures. Our CBA Economics team continues to expect the upcoming inflation and wages data will be much stronger than the RBA’s forecasts, thereby prompting the RBA rate ‘lift‑off’ in June,” Kong also said on Tuesday.

The rally is an added headwind for a GBP/AUD exchange rate that was also weighted down last week when the Bank of England (BoE) indicated that economic damage done by runaway increases in oil and gas prices could potentially serve as a substitute for further increases in Bank Rate.

“We see room for [GBP/USD] to appreciate, but in the short term the perception of a less aggressive tightening cycle in response to the Ukraine war will limit GBP's ability to rally,” says Marek Raczko, an FX strategist at Barclays.

GBP to AUD reference rates at publication:

Spot: 1.7790High street bank rates (indicative band): 1.7167-1.7292Payment specialist rates (indicative band): 1.7630-1.7665Find out about specialist rates, hereSet up an exchange rate alert, hereThe BoE lifted Bank Rate back to the 0.75% it was at prior to the coronavirus crisis last week but financial markets have been wagering that multiple further increases would lift the cash rate to 2% or more this year and these expectations were called into question by language in Thursday’s statement.

Resulting declines in Sterling helped pull the Pound to Australian Dollar rate back to a major technical support level around 1.78 that has been under pressure throughout much of the year-to-date and which would likely fail if AUD/USD climbs further above 0.74 during the week ahead.

“We maintain our long from 0.7190 and we shift our stop up to a close below 0.7250. We remain surprised by the speed with which the A$ has recovered from the pre-FOMC dip. To be sure, we see the commodity story as remaining super supportive, with a terms of trade explosion to significantly increase record Australian trade surpluses in the months ahead,” says Robert Rennie, head of financial market strategy at Westpac.

“However, the Russia-Ukraine war is set to hit European and global growth, and this is hardly a positive backdrop for pro-cyclical assets like the A$ in the months ahead. So we tend to see the top of the current channel at 0.7420/ recent high at 0.7441 capping the move in the near term,” Rennie and Westpac colleagues wrote in a Tuesday market commentary.

Above: Pound to Australian Dollar rate shown at daily intervals alongside AUD/USD.

Much depends for the Sterling-Aussie rate on the pace at which AUD/USD climbs during the days ahead and on the extent to which the main Sterling exchange GBP/USD is able to keep up, with any foot-dragging by the Pound likely to result in a lower GBP/AUD exchange rate.

The Pound to Australian Dollar exchange rate tends to closely reflect the relative performance of Sterling and the Australian Dollar when each is measured against the U.S. Dollar, although GBP/AUD often demonstrates a negative correlation with AUD/USD.

“With the UK a net energy importer, higher oil and gas prices will cut incomes. The BoE’s meeting minutes noted their business liaison indicated the war injected significant uncertainty for UK businesses and had cut sales expectations. AUD/GBP can approach the 2021 high of 0.5733 if UK economic data softens because of the Ukraine war,” says Joseph Capurso, head of international economics and a CBA colleague of Kong’s.

The Pound to Australian Dollar rate would trade down to around 1.7442 if Capurso and CBA colleagues are right to look for AUD/GBP to approach its 2021 high of 0.5733 during the coming weeks.

The week ahead is devoid of major appointments on the economic side for the Aussie but will see several important reports published in the UK.

“We expect February inflation to print strongly, continuing an ascent to above 8% in Q2,” Barclays’ Raczko says. “The Spring Statement [Wednesday] on the budget will likely focus on supporting households through the cost of living crisis, but we do not expect any meaningful fiscal easing.”