- Australian economy to draw support from buoyant global backdrop.

- RBA to raise rates to 1.75% in December 2018 say Commerzbank

- AUD/USD to rise 5% while GBP/AUD seen 10% lower by year-end.

© Taras Vyshnya, Adobe Stock

The Pound could be staring down the barrel of a double digit decline against the Australian Dollar, according to the latest set of forecasts from Commerzbank, with all of this loss to come before year-end.

This is seen as likely because Australia's economy remains in relatively good health and the global backdrop is also supportive of continued growth, which means the Reserve Bank of Australia may not be able to sit idly by while other central banks elsewhere continue to raise interest rates.

In other words, an interest rate rise down under may come sooner than markets give the RBA credit for, while speculation about a possible change in monetary policy could be just months away, which would have an impact on the Aussie Dollar.

"Australia is benefiting from the global upswing not only through increased foreign demand, but also through rising commodity prices, which support the Australian terms-of-trade," says Esther Reichelt, an analyst at Commerzbank. "As we expect market speculation for interest rate hikes to increase during the course of the year, we expect the AUD to appreciate slowly in the upcoming quarters."

This call comes at a time when the Pound-to-Aussie exchange rate has risen by nearly 7%, denoting a stronger Sterling and weaker Australian Dollar. In fact, the Aussie Dollar has fallen against most of its developed world rivals so far in 2018:

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Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.A more pessimistic outlook for Australian interest rates has been a major driver of this Australian Dollar decline. The interest rate set by central banks has long been on of the most significant drivers of currencies as global money tends to hunt out higher interest rates; those regions that have high interest rates, or are expected to enjoy higher rates in the foreseeable future, tend to command a stronger currency.

Expectations for future Australian interest rate rises are presently subdued owing to a weaker-than-expected inflation performance at the end of 2017 and continued poor levels of wage growth.

If inflation risks are benign, there is very little cause for policymakers to raise rates.

Australian inflation remains below the lower band of the 2% to 3% inflation target and recent bursts of wage growth have been driven largely by public sector pay rises and increases to the minimum wage, not by a tightening labour market.

Accordingly, the RBA has now held its cash rate at a record low of 1.5% for 19 consecutive months and is not currently expected to raise it from here until well into 2019 which has in turn fed into a softer Aussie Dollar.

"The Australian central bank is likely to principally welcome the AUD weakness, as it tried to prevent further AUD appreciation over the past year due to continued weak inflation levels," says Reichelt, noting the RBA's dislike of currency strength, which can reduce inflation by making imports cheaper to buy.

Mounting fears over a possible trade war between the US and China have also been a factor behind the Aussie's weakness too, buffeting global markets and the Aussie Dollar repeatedly in recent months.

Australia has a large economic exposure to China and is heavily reliant on global trade so fears of damage or disruption to either of these will always hamper the currency.

However, a conciliatory speech from Chinese President Xi Jingping last week has since helped to ease market concerns over international trade.

"We believe that the RBA will continue to critically monitor the AUD level for the foreseeable future, which argues against a significant appreciation of the AUD - at least until inflation has returned to the target range on a sustained basis," says Reichelt. "For this reason, the RBA will also try to keep interest rate expectations aloof even though speculations increase of central banks moving away from ultraexpansionary monetary policy globally."

With Reichelt's comments in mind, the 2018 deterioration of interest rate expectations and subsequent Australian Dollar weakness would appear to play right into the hands of a central bank hoping to stoke a recovery of inflation.

More importantly, this deterioration has now left the market "underpriced" for any change in monetary policy for almost the next 18 months as the market implied Australian cash rate in overnight index swaps markets does not reach 1.75% until after May 2019.

This is a substantial deterioration from the situation that prevailed on December 29, 2017, when those same markets were betting heavily that the RBA would raise its interest rate in December 2018.

Any reversal of this could act as a powerful stimulant to the Australian Dollar as and when it occurs.

"Since we expect the growth outlook to remain positive as well, despite increased risks for global trade, we see room for an increase in interest rates already this year," says Reichelt.

Even the Reserve Bank of Australia has said it expects Australian growth to be faster in 2018 than it was last year and at a rate that is above the economy's "potential", which is positive for inflation outlook.

Moreover, bank rate setters agreed in their latest meeting that the next move in the Australian cash rate is likely to be up and not down, according to the latest set of minutes. For what it's worth, this is the first time the entire board has explicitly acknowledged that.

On balance, Reichelt and the Commerzbank team forecast the RBA will raise its interest rate in December 2018 but that the Aussie Dollar will benefit from speculation about an interest rate rise much sooner.

They forecast the AUD/USD rate will rise to 0.82 before year end, which is an increase of 5% from the 0.7750 level prevailing Tuesday.

The Pound-to-Australian Dollar rate however, is forecast to fall sharply over coming months, to 1.6585 before year-end. This would require a fall of more than 10% from Tuesday's 1.8440 level.

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Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.