GBP/AUD rebounding from major support around 1.6874Could stabilise short-term but upside likely to be limited Upside risks from fragile & fickle global market sentimentDownside risks from UK's wobbly economy & AUD/USD

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The Pound to Australian Dollar exchange rate reached new lows for the year and its softest level since October 2017 to open the new week but appeared to stabilise near an important level of technical support around 1.6874 on charts, suggesting a tentative bottom may be in for GBP/AUD.

Sterling unfurled to new lows against many currencies in the opening two sessions of the new week, continuing a nascent run of underperformance that has placed post-referendum lows on the table against the better performing currencies like the U.S. and Canadian Dollars.

“The UK may well enter recession with rampant inflation at 10.1% annualized in July. An acute energy crisis this winter adds to the downside,” says Clemence Dumoncel, a strategist at UBS Global Wealth Management.

“We think this leaves investors who are long GBP in a challenging position as winter approaches. Hence, our recommendation is to still hedge near-term downside risks,” Dumoncel said on Tuesday and in reference to GBP/USD.

GBP/AUD remained comfortably above its Brexit era low and appeared to be stabilising on Tuesday as a recovery in fragile global markets began to lose steam but the ebb and flow of risk appetite among international investors will likely remain an important influence through the remainder of the week.

Above: GBP/AUD shown at hourly intervals bouncing off important support level at 1.6874 as GBP/USD and S&P 500 fall.

The Australian Dollar benefited more so than many other currencies when the U.S. Dollar ebbed from its earlier peaks throughout the month to mid August, leading GBP/AUD to come under further pressure that already had it teetering on the verge of 5-year lows coming into the new week.

Australian Dollar resilience and the underperformance in Sterling has led to an almost 9% fall in GBP/AUD for the 2022 year to date but more than a third of that decline took place over the course August and there is little sign of a meaningful reversal in the pipeline even with Tuesday’s rebound.

“Aussie strength can be attributed to strong commodity prices that are providing a terms-of trade tailwind,” says Chester Ntonifor, chief FX strategist at BCA Research, who recently suggested that clients buy the AUD/USD exchange rate on any falls toward the 0.6650 level.

“Australia provides a lot of the commodities countries need and want in today’s paradigm. That is bullish. Yet exposure to China is a clear risk that investors need to factor into investment decisions,” Ntonifor wrote in research last week.

While the Pound tumbled to new post-pandemic lows against the U.S. Dollar in August, AUD/USD staged a recovery and held onto much of its gain in a buoyant performance that, if continued, would limit GBP/AUD’s ability to recover even if Sterling manages to stabilise against the greenback.

Above: GBP/AUD shown at daily intervals alongside AUD/USD and S&P 500.

“AUD/USD is likely to be weighed down by a stronger USD and concerns about a global recession. AUD is unlikely to react more than temporarily to this week’s domestic data,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

“Thursday’s capex data is most important because it includes intentions. With interest rates rising, and concerns about the economic outlook increasing, our Australian economics team expect a downgrade to capex intentions for 2022/23,” he adds.

There is little in the UK and Australian economic calendars to leave much of a mark on either Sterling or the Aussie this week but the Pound could be vulnerable to any further acceleration of gas prices while both currencies will be sensitive to any changes in the mood on global markets.

The latter is likely to be most responsive to U.S. economic data and any implications for Federal Reserve (Fed) interest rates in the days ahead but the effects on GBP/AUD may be limited in the absence of anything that elicits a renewed abandonment of risky assets.

“[U.S.] Payrolls are key this week and another robust number will have markets leaning more strongly to +75bp at the 21 Sep FOMC,” says Richard Franulovich, head of FX strategy at Westpac.

Above: GBP/AUD shown at weekly intervals with Fibonacci retracements of 2016 recovery uptrend indicating possible areas of technical support. Click image for more detailed inspection.