GBP/AUD could attempt to establish footing near 1.6874After extended slide leads to 5-yr lows & major support GBP bogged down by antipathy to European currenciesAUD outperforms but outlook hinged on USD direction

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The Pound to Australian Dollar exchange rate approached new five year lows this week but with a major level of technical support now nearby on the charts, any further losses may be limited to around the 1.6874 level in the days ahead.

Sterling built upon earlier losses against many currencies throughout much of August but came close to five year lows against the Australian Dollar this week when sinking below 1.70 on Thursday and for the first time since October 2017.

GBP/AUD losses deepened on Thursday as antipodean currencies outperformed alongside others that are sensitive to movements in the Renminbi or changes in the Chinese economic outlook, and European currencies underperformed even in what was an upbeat market for risky assets.

“The more the Chinese authorities do to stabilize the economy with fiscal measures, and the less they use a weaker currency to help, the better for the AUD. We're long-term bulls, vs the USD, but also against the European currencies,” says Kit Juckes, chief FX strategist at Societe Generale.

Above: Pound to Australian Dollar rate shown at hourly intervals with AUD/USD.

Thursday’s price action followed a decision by the Peoples’ Bank of China (PBoC) to set the midpoint of the permissible trading band for USD/CNH higher than local analysts had anticipated and came after the government announced a small economic stimulus package worth around CNY1trn (£123BN).

“All G10 currencies are showing at least slight gains against the greenback in overnight trading, with AUD and NZD leading the way. Those currencies are likely taking their cues from RMB, at least in part,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.

The Renminbi’s steadier performance and a softer U.S. Dollar were the main burdens for the Pound to Australian Dollar rate on Thursday but Sterling has been under pressure from the Aussie throughout much of the month and in part due to a souring of market appetite for European currencies.

“The pound has failed to strengthen on the back of sharp hawkish repricing of BoE rate hike expectations that is still taking place. The UK rate market has moved a long way in a short period of time to price in a much higher terminal rate,” says Lee Hardman, a currency analyst at MUFG.

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

Thursday’s loss was one of six consecutive declines for Sterling dating back to late last week when UK inflation reached double-digit percentages and Russia’s Gazprom said it intends to curtail European gas supplies through its pipeline network again for three days in early September.

“This gas story looks here to stay for the next few months, with one of the fresh risks being whether the US hurricane season disrupts US gas production and LNG exports,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

Surging energy costs and elevated inflation are widely expected to hamper European economies and currencies in the months ahead but in the shorter-term GBP/AUD is likely to be most sensitive to whether a recently softer U.S. Dollar enables the current rebound in AUD/USD to continue.

“AUD/USD is currently materially undervalued but we do not expect its undervaluation to ease anytime soon. The next big move in AUD/USD will likely be guided by the USD’s reaction to Jackson Hole,” says Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia.

Above: Pound to Australian Dollar rate shown at weekly intervals with Fibonacci retracements of 2017 recovery indicating possible short and medium-term areas of technical support for Sterling. Click image for closer inspection.

“It will not be until tomorrow afternoon when FOMC Chair Powell takes the stage. Given the hawkish repricing of FOMC rate hikes over the past few days, we judge there is a risk Powell’s speech disappoints markets and sparks a correction in the USD,” Kong said on Thursday.

GBP/AUD could fall further up ahead and as far as the Fibonacci support level at 1.6874 shown in the above chart unless this Friday’s remarks from Federal Reserve Chairman Jerome Powell are able to hinder the rally in AUD/USD.

The Pound to Australian Dollar rate tends to closely reflect the relative performance of Sterling and the Australian Dollar when each is measured against the U.S. Dollar but also often tends to demonstrate a negative correlation with AUD/USD.

“Overall, we suggest that the USD has been very well-owned of late, and it is becoming a more difficult call to make long term bearish cases for AUD and NZD at these levels. Short-term yes, there may be some more pressure, but our growing sense is that long-term buyers are now targeting weakness,” says Patrick Bennett, head of Asia FX strategy at CIBC Capital Markets.

Above: AUD/USD shown at weekly intervals with GBP/AUD. Click image for closer inspection.