- GBP/AUD in first weekly advance in four weeks

- But Westpac say pair could still fall back to below 1.78

- Melbourne covid-19 lockdown unlikely a game changer for AUD

Above: Woman Wearing a Mask Crossing Road Near Flinders Street Station in Melbourne. Image © Adobe Images

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The British Pound looks set to record its first weekly advance against the Australian Dollar in a month, with a 1.10% gain taking the GBP/AUD exchange rate back above 1.8100 to 1.8155.

The move comes amidst a combination of a broadly improved Pound Sterling exchange rate complex as well as weakness in the Australian Dollar owing to a sharp fall in stock markets as well as concerns over the Australian economy's ability to shake off the covid-19 pandemic now that its second city is locked down for a second time.

But, the covid-19 outbreak in Melbourne and the subsequent six-week lockdown imposed on the city are unlikely to be game changers for the Australian Dollar say analysts at Westpac, who have updated clients with their latest forecasts and views for the GBP/AUD exchange rate.

The Australian lender tells clients that "the resurgence of Covid-19 cases in Victoria is obviously a concern but Australian Dollar price action suggests it is not regarded as a game-changer."

The city has today begun a second lockdown in response to a spike in new coronavirus infections that will see approximately five million residents barred from leaving home for six weeks, except for essential reasons.

Police say they are setting up a "ring of steel" around the city, with "checkpoints anytime and anywhere" to enforce the measures.

Melbourne is a key economic hub for Australia and there will certainly be a hit to economic growth, but foreign exchange analysts at Westpac note that the currency continues to be largely driven by global investor sentiment, which has improved markedly since March.

"The Aussie is strongest in the G10 over the past 3 months, up 11%, compared to 1% for the British Pound against the U.S. Dollar," says Sean Callow, FX Strategist at Westpac. "Australian Dollar resilience in recent weeks despite a more mixed global risk mood suggests underlying optimism over Australia’s post-pandemic recovery compared to the UK."

Indeed, despite the second lockdown being announced in Melbourne, the consensus amongst economists is for Australian GDP to contract -4% over 2020, versus -8.5% in the UK.

"Australia’s fiscal boost was larger than the UK’s but the UK is planning fresh support as Australia looks to trim its spending," says Rennie.

The UK announced fresh support to the tune of £30BN on Wednesday when Chancellor of the Exchequer Rishi Sunak set out the Government's Summer Economic Review which largely centred around the preservation of jobs but did include targeted measures aimed at assisting the hard-hit hospitality sector.

Some economists say the measures are unlikely to prompt a sharp v-shaped recovery in the UK economy, while others say the targeted nature of the interventions mean the Chancellor will get a decent 'bang for his buck'.

However, the Australian Dollar can rely on one additional source of fundamental support: Australia's positive current account balance which is the result of the country exporting more than it imports. This contrasts to the UK's current account deficit, which is one of the largest amongst developed nations and places Sterling at risk of decline in the event of foreign capital outflows.

"Australia’s C/A position (surplus) is much more supportive than the UK’s (deficit), helping AUD against GBP," says Rennie.

On the matter of Brexit trade negotiations, Westpac say "potential wobbles" also open up risks for GBP/AUD, which could slip below their 1.78-1.79 end-Sep baseline forecast.

The Pound has however recovered some ground against the majority of the world's developed market currencies over the course of July amidst observations that the EU and UK could be nearing some tentative 'landing zones' for the particularly difficult aspects of the negotiations that are preventing a deal from being struck.

The improved sentiment has seen the Pound-to-Australian Dollar exchange rate recover back above 1.80 to quote at 1.8088 at the time of writing, and should the pair complete another daily gain it would cement a view that a sideways-orientated period of consolidation might be setting in.

But a sustained rally in the pair is only likely on any indications that the EU and UK are indeed heading for a trade deal.