- AUD trades higher as markets pare losses

- But expect a more volatile market over coming days

- GBP/AUD strength unlikely to last as trend is firmly lower

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GBP/AUD spot rate:1.8047Bank transfer rates (indicative guide): 1.74-1.7540FX specialist rates (indicative guide):1.7620-1.7880Find out moreThe Pound has started the new week on the backfoot against the Australian Dollar which appears to have found a renewed bid on a turn-around in global stock markets.

The Australian Dollar went higher against most rivals as stock markets recovered some of the earlier losses suffered earlier on Monday, while commodity prices such as oil, gold and copper went went higher.

"With the correlation between FX and stock markets going through the roof in recent months as the dollar reclaimed its safe-haven throne, risk sentiment has become the dominant force in the currency arena. Emotions are the name of the game, and those can swing wildly and quickly. In a few short weeks we’ve gone from caution, to panic, to skepticism, to greed, to euphoria, and now we seem to have come back to the caution stage," says Marios Hadjikyriacos, Investment Analyst at XM.com.

The Aussie Dollar maintains a high level of correlation with markets and we would therefore expect the coming week to further gyrations based on the broader market backdrop.

"G10FX is an equity trade. The typical high-beta currencies like AUD/NZD/CAD have led the G10 complex in performance against the USD amid high and stable correlations to equities," says Mark McCormick, Global Head of FX Strategy at TD Securities.

The outperformance of the Aussie Dollar is clearly reflected in an ongoing downtrend in the Pound-to-Australian Dollar exchange rate, a trend that should continue to play out over coming days and weeks according to technical studies.

Last week GBP/AUD fell a further 1.0%, ensuring it has fallen for 9 of the past 11 weeks, the trend is lower and we see no evidence suggesting the trend should be questioned at the current time.

The Relative Strength Index on the daily charts - a key indicator of where momentum lies - is at 33.70 which puts it firmly in downtrend territory, only a move above 50 would suggest momentum has returned to favour Sterling and this outcome remains some way off.

Expect the global economic recovery narrative to retain a tight lock on GBP/AUD, with an ongoing trend of improvement aiding AUD. However, injections of uncertainty - for example surrounding the rise of new infections in the U.S. - can offer momentary periods of relief for the exchange rate.

But owing to the broader trends in play any weakness in the exchange rate will likely remain limited in nature and duration.

"Improving news and some suggestions that the pandemic may have reached its peak have seen the AUD outperform. Its medium-term prospects are likely to hinge on how fast activity can resume and how well economies cope with resurgences in case numbers," says Daniel Been, Head of G3 & FX Research at ANZ Bank.

ANZ maintain a "mildly bullish" stance on the Australian Dollar.

Should equity markets push higher over coming days there a likelihood that AUD will find itself supported.

A key risk to the market outlook does however remain the ongoing rise in global covid-19 infections as the number of reported new infections worldwide has reached a new high of 183K, with 116K of this being in the Americas.

The nationwide infection rate in the U.S. has risen again to 7.9 per 100K while in Brazil 14.8 cases per 100K inhabitants have been announced.

"Markets kicked off the week on a mixed note, as investors couldn’t decide on where to go next as two major opposite forces muddle the sentiment at the moment: the rise in new coronavirus cases and the massive monetary and fiscal interventions," says Ipek Ozkardeskaya, market analyst at Swissquote Bank. "Low volumes and high volatility were on the menu of Monday."

Despite the relative relief for Sterling on Monday, it must be emphasised that the near-term trend against both the Euro and Dollar is still lower, and for now any strength in Sterling will likely prove limited.

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The Dollar has appeared to find its feet since covid-19 concerns started to rise in the U.S. again, and should this theme play out further over coming days we might expect further gains at the expense of the Pound and Euro.

"Concerns of a second wave of the COVID-19 pandemic and weak economic data remain the main catalysts in the FX markets and are translating into a higher USD across the board. After all, the greenback remains the safe-haven currency of choice when risk aversion resurfaces across markets, prevailing over the JPY and the CHF. This resulted in what has become a familiar pattern this year, with both the EUR and GBP dragged lower and below 1.12 and 1.24 respectively," says Roberto Mialich, FX Strategist at UniCredit Bank in Milan.