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The Pound to Australian Dollar exchange rate (GBP/AUD) is poised for downside according to new analysis from JP Morgan, the global investment bank.

Strategists at JP Morgan are sellers of GBP/AUD as they anticipate an ongoing underperformance by the Pound which looks particularly vulnerable against 2023's top-performing Aussie Dollar.

"China reopening and property market stimulus expectations drove copper to new YTD highs this week. That helped cyclical currencies such as AUD perform. We remain long AUD on crosses against CAD and GBP," says James Nelligan, a strategist at JP Morgan.

The Australian Dollar has benefited from China's decision to abandon its zero-Covid policy which economists say opens the door to higher economic growth rates in the world's second economy, underscoring support for Australian industrial commodity exports.

The policy shift also boosts Australia's prospects as high-value Chinese tourists and students are expected to make a return.

"The Australian and New Zealand dollars are the best performing major currencies so far this year, with optimism about China’s reopening being a key factor," says Raffi Boyadjian, Lead Investment Analyst at XM.com.

The China reopening story has been one of the key financial market themes of 2023, but JP Morgan says the trade is not done, presenting the prospect of further AUD upside.

"We mapped AUD returns against China growth in our note this week to confirm that they don’t look excessive as yet. As a result we want to increase our exposure to the theme of China reopening and property market stimulus," says Nelligan.

Chinese policymakers meanwhile continue to signal a desire to boost the Chinese housing sector which JP Morgan says the Australian Dollar has clear exposure via copper and iron ore exports which are used directly in property construction.

"A boost in Chinese housing market activity could provide another tailwind to AUD longs," says Nelligan.

The British Pound is meanwhile expected to deliver the kind of underperformance that makes the Aussie Dollar's star shine brightest.

"We remain of the view that stagflationary dynamics are entrenched, and even worsened in the most recent data flow, so trades like short GBP/AUD can still perform," says Nelligan.

Above: "Supply side labour market issues more severe in GBP and more favourable in AUD" - JP Morgan.

The Pound has been relatively strong thus far in 2023, however, aided by broadly firmer global equity markets, improved sentiment and signs that the UK economy avoided recession in the final quarter of 2022.

However, sentiment towards the UK took a knock on Tuesday Jan. 24 after PMI data showed the economy slowed in January and economists confirmed a recession was now underway.

The Composite PMI - which gives an indication of the broader economy's performance - read at 47.8, down on December's 49 and below analyst forecasts for 49.1.

Markets bet that the deterioration in the survey data could prompt the Bank of England to raise interest rates by 25 basis points on February 02, which would be less than the 50bp hike markets were expecting at the start of this week.

Money market pricing meanwhile shows investors have raised bets for a 25 basis point rate cut to be delivered by the Bank before the end of 2023 as they respond to an economic slowdown.

This repricing in expectations has weighed on the Pound and will burnish confidence that GBP/AUD can fall further.