GBP/AUD in retreat & risks retesting 1.75 As GBP underperforms, AUD outperformsRetail sales, RBA policy in focus for AUD

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The Pound to Australian Dollar rate retreated from near three-month highs and was at risk of sliding back toward the 1.75 handle early in the new week as Sterling underperformed many other major currencies while the Aussie topped the board alongside the Canadian Dollar.

Australia’s Dollar was the best performer within the G10 contingent on Tuesday while Sterling was close to plumbing the bottom of the bucket having been outpaced on the downside by only the Japanese Yen and Euro.

“AUD outperformed most major currencies, global equity markets are higher and industrial commodity prices (copper and iron ore) rallied after China eased restrictions for inbound visitors,” says Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.

Above: Interbank reference rates for selected Sterling exchange rates and performances over intraday and one week horizons. Source: Netdania Markets.

“The collapse in the 7‑day average of new Covid cases in China suggests additional unwinding in Covid‑related restrictions are likely and supports the case that China’s economic slowdown is bottoming‑out. Indeed, China’s PMIs are expected to recover in June above the 50 boom/bust threshold (Wednesday). But as long as China sticks to its Covid zero goal, further domestic economic disruptions cannot be ruled out,” he added.

Many around the market cited falling coronavirus infections and easing restrictions in China for the Australian Dollar’s Tuesday outperformance.

Above: Interbank reference rates for selected U.S. Dollar exchange rates and performances over intraday and one week horizons. Source: Netdania Markets.

The Australian Dollar outperformed alongside the local bond market and amid strong gains for stock and commodity markets across the globe, with the latter rebounding from heavy losses sustained last week when financial markets were said to have grown concerned about the outlook for the global economy.

“Even with the tin bounce though, the LMEX index is down almost 13% this quarter, signalling that the global growth outlook is deteriorating markedly as central banks raise rates super aggressively, the Fed enacts record QT, and China maintains its zero Covid policy. The A$ should remain capped by the 0.6970/0.7210 region,” says Richard Franulovich, head of FX strategy at Westpac, in reference to AUD/USD.

Above: Selected global markets and performances over intraday and one week horizons. Source: Netdania Markets.

“The 0.6750 level looks like the next obvious target for the A$ near term and we have been arguing for some time for further weakness below 0.70, and that we would give this dip time to unfold, especially given widespread stagflationary/ recessionary pressures. However, we remain of the view that dips towards 0.6750 are a buy opportunity,” Franulovich said on Tuesday.

The Pound to Australian Dollar exchange rate slipped back below the 1.76 handle on Tuesday as the main Aussie exchange rate, AUD/USD, levitated above the 0.69 handle even as the U.S. Dollar advanced on other currencies including Sterling, which slipped back toward the round number of 1.22.

Much about the outlook for GBP/AUD in the days ahead depends on whether the Aussie is able to maintain its Tuesday outperformance and that in turn is likely to be hinged to at least some extent on the outcome and implications of Wednesday’s Australian retail sales figures for May.

Above: Pound to Australian Dollar rate shown at 4-hour intervals with Fibonacci retracements of June rebound indicating possible areas of short-term technical support for Sterling and resistance for Australian Dollar.

“Softer consumer spending activity will reinforce CBA’s view that the RBA tightening cycle will be shallower than implied by interest rate futures. CBA anticipates a cash rate target of 2.10% by year‑end while RBA futures pricing currently imply a cash target rate of 3.30%. A result closer to our forecast could push AUD/USD closer to the year‑to‑date low of 0.6829,” Haddad cautions.

Haddad and the CBA team warned on Tuesday that market expectations for a 0.3% month-on-month increase in retail sales are likely too optimistic and have forecast a -1% decline that could leave market expectations for the Reserve Bank of Australia (RBA) cash rate also appearing as overly ambitious.

To the extent that Wednesday’s retail sales data does weigh on AUD/USD, it would potentially curb the Monday and Tuesday slide in GBP/AUD, which tends to closely reflect the relative performance of Sterling and the Aussie when each is measured against the U.S. Dollar.

Above: AUD/USD shown at daily intervals with Fibonacci retracements of June fall indicating possible areas of short-term technical resistance for the Aussie and featured alongside GBP/USD and S&P 500 futures.

Meanwhile, any dampening of expectations for RBA interest rates would be in keeping with the sentiments expressed by RBA Governor Philip Lowe last Monday when he suggested the RBA can afford to take a patient and measured approach to bringing inflation back within the two-to-three percent target band.

But the governor has made more recent remarks at a UBS Investment Bank conference last Friday where did, however, imply that the evolution of wage pressures in the Australian economy will be important influences on exactly how patient and measured RBA rate setters feel they are able to be.

"For the past decade or maybe two decades we haven't really had any indexation because people didn't really worry too much about what the inflation rate in any particular year was because they were confident that over time inflation would be two point something or other. But now there's a very strong focus in parts of the labour market on getting full compensation for the higher inflation," Governor Lowe said last Friday.

"Given that shift in psychology it's very important that we can chart a credible path to two-to-three percent inflation because I think if we do that the shift in psychology won't persist but if people start to worry that we can't chart that credible path back then I think the shift in psychology could be quite persistent and we know where that ends. It ends in persistent inflation and then we have to have much higher interest rates and an economic downturn," he added.