- GBP/AUD forecasts raised at CBA, Nomura as outlook brightens.

- GBP/AUD on course for 1.73-to-1.92 range through 2022 at CBA.

- Nomura raises forecasts to 1.86 & 1.92 for year-end 2021 & 2022.

- As supportive budget, vaccine outperformance bolster UK outlook.

Image © Desiree Caplas, Adobe Stock

GBP/AUD: spot rate at time of writing: 1.7954Bank transfer rate (indicative guide): 1.7330-1.7456FX specialist providers (indicative guide): 1.7690-1.7833More information on FX specialist rates here The Pound-to-Australian Dollar rate remained in the black for the fledgling year even as it beat a tentative retreat on Thursday but may see one-year highs and above before the curtain closes on 2021, according to newly upgraded forecasts from Commonwealth Bank of Australia (CBA) and Nomura.

Sterling was in retreat alongside the U.S. Dollar, American bond yields and safe-haven currencies like the Japanese Yen on Thursday, while riskier currencies like the Australian Dollar advanced alongside stock and commodity markets, leading GBP/AUD to fall -0.34% before trading just below the 1.80 handle.

This was as Washington's latest support package for companies and households, which includes provision for cheques of up to $1,400 to be sent to qualifying households and has been dubbed the 'American Rescue Plan', made its way to President Joe Biden's desk.

Australian Dollar gains and Sterling's losses also followed a large, 10-year U.S. government bond auction that went without hitch in the prior session and in the face of concerns about possible lacklustre demand owing to the outlook for interest rates at the Federal Reserve (Fed).

The U.S. Treasury sold around $38bn of 10-year bonds at a yield of up to 1.52%, the highest of any 10-year auction since February 2020, but with continued high levels of demand from the market that may have eased investors' fears about the trajectory of U.S. bond yields, supported the Aussie Dollar and weighed on GBP/AUD this Thursday.

"Our forecast for commodity prices to fall in 2022 adds to AUD/GBP downside. In our view, the main risks to our forecasts are to the downside. AUD/GBP can fall if China lowers steel production or if the EU or US impose a carbon border fee," says Kim Mundy, a strategist at CBA.

Above: Sterling quotes and performances Vs other currencies over selected horizons. Source: Netdania Markets.

The recent rout in the U.S. and global government bond markets has been a key factor in sustaining the Pound-to-Australian Dollar rate near to the 1.80 handle it gave up on Thursday and was a core consideration in the latest review of Commonwealth Bank of Australia's forecasts.

The U.S. Dollar has risen against all majors in March but has been widely expected to fall against many major currencies this year for a range of reasons including what was sometimes billed as a more favourable outlook for economies outside of the U.S.

U.S. vaccination success has since muddied those particular waters while also encouraging the yield rally, although CBA sees neither of these factors meriting a change of expectations for a 2021 Dollar depreciation and further gains for commodity as well as risk-sensitive currencies.

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GBP/AUD Forecasts Q2 2023 Period: Q2 2023 Onwards Details: Consensus institutional forecast targets + max & min targets. Contributors: Citi, Barclays, Morgan Stanley & more Provider: Global Reach Type: Free Download Please Access Here

{wbamp-hide end}{wbamp-show start}{wbamp-show end}But these factors are offset to some extent when it comes to the Aussie lender's forecasts for the Pound-to-Australian Dollar rate following January's trade agreement with the EU and given that Britain's pole position in the race to vaccinate populations against the coronavirus has made the economy a contender for outperformance in 2021.

"We forecast AUD/GBP will peak at 0.5760 in Q321 before falling to below 0.5200 by the end of 2022. In the short‑term, our stronger AUD/GBP forecasts are driven by our outlook for a stronger AUD because of higher commodity prices. However, the medium‑term weakness is mostly a GBP story. We see substantial upside to GBP/USD because of the UK’s narrowing current account deficit, GBP’s undervaluation on a range of measures and less Brexit‑related uncertainty," Mundy says.

CBA forecasts suggest that Australian Dollar strength will put GBP/AUD under pressure through the summer months but that an eventual ebbing of the antipodean unit's momentum will, when combined with a broader recovery for Sterling, enable GBP/AUD to rise from an anticipated third-quarter trough around 1.74 and to 1.92 by the end of next year.

Above: Pound-to-Australian Dollar rate shown at weekly intervals alongside AUD/USD (black line).

The Pound was the best performing major currency of 2021 until Thursday when a rally by the Norwegian Krone saw the oil-linked European unit briefly knocking its British counterpart off that perch, but Nomura envisages Sterling advancing further on the Aussie this year.

"There are several reasons why we think GBP should continue to outperform," says Jordan Rochester, a strategist at Nomura. "This environment, with a rotation from Tech stocks, is positive for GBP, and we are seeing this via a pick-up in foreign investor ETF inflows. The rollout of vaccines has allowed a clear roadmap towards some level of normality, removing the uncertainty over the UK government’s plans for this summer. Finally, the UK’s budget."

With the UK holding a months-long lead on vaccinations, the economy was already expected to outperform even before last week's expansionary budget.

The latter saw Chancellor Rishi Sunak extend the government's job support scheme and announce a range of other potentially supportive measures including a corporation tax reform, some of which will continue to underpin the comparatively 'hawkish' monetary policy stance of the Bank of England (BoE).

However, the Aussie is among the most sensitive to commodity prices that have risen substantially amid improving expectations for the global economy and which could rise further still. That would certainly support a correction of the Aussie's undervaluation, but may even lift its perceived 'fair value' further.

This is why despite Nomura's new forecasts placing GBP/AUD on course for 1.9358 and its highest since April 2020 for this year, they also envisage a 2022 softening to 1.9268 as the Aussie Dollar gathers steam.

Nomura looks for AUD/USD to reach 0.80 by year-end ahead of a rise to 0.82 in 2022, with both reflecting upgrades from 0.78.

"Our (modestly) higher forecasts sit a little above the current consensus and forwards," Rochester says. "AUD/USD experienced a 4% pullback from recent highs, having managed to just touch AUD/USD0.80. We think the decline was mostly driven by a stronger USD (good US growth, higher US rates, positioning). However, our take on key AUD drivers remains mostly positive. In the near term, we acknowledge current market volatility and the stronger USD."

Above: Pound-to-Australian Dollar rate shown at monthly intervals alongside AUD/USD (black line).