- GBP/AUD pointed lower near-term

- AUD benefits from firming commodity prices

- AUD benefits from lockdown easing measures in Australia

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- GBP/AUD spot at time of writing: 1.9297

- Bank transfer rates (indicative): 1.8624-1.8760

- FX specialist rates (indicative): 1.8830-1.9120 >> more information

Pound Sterling is trading lower against the Australian Dollar in the mid-week session as a short-term trend of depreciation extends courtesy of increased confidence in global investor sentiment and firming commodity prices, both of which tend to favour the Australian currency over its British counterpart.

The Pound-to-Australian Dollar exchange rate has as a result dipped back towards 1.9297, having briefly spiked to 1.9534 on Monday; price action which tells us that the Australian Dollar remains favoured in the short-term.

Indeed, in our week-ahead forecast note we reported that charts were advocating for more losses in GBP/AUD as long as the pair remains below 1.9838 resistance, a view that appears to playing out as we move through the mid-week session.

Above: Daily chart for GBP/AUD shows near-term bias remains down

'Risk on' currencies such as the Australian Dollar are outperforming on global foreign exchange markets midweek, courtesy of investor expectations that the gradual reopening of the global economy will lead to an economic recovery over coming weeks and months.

This sentiment is being reflected in firmer stock markets and, perhaps more importantly for the Aussie Dollar, rising commodity prices with oil benchmarks leading the way in staging a strong recovery.

Both Brent crude and WTI oil spot prices have improved notably, and this has in turn aided those countries that are to a decent degree tied to the energy sector (note that Australia's third most important export is natural gas).

"Oil markets continue to move higher, with ICE Brent breaking above US$30/bbl yesterday, and settling just shy of US$31/bbl. The strength in flat price has been accompanied by a strengthening in both WTI and Brent time spreads. There has been a real shift in sentiment over the last week, as we start to see a gradual recovery in demand, with the easing of some country lockdowns," says Warren Patterson, Head of Commodities Strategy at ING Bank N.V.

But for the Australian Dollar, it is the improvement in the base metal sector that is likely to matter even more, considering Australia's exports are dominated by metals such as iron and copper. Iron ore, copper, aluminium and nickel are all trading higher mid-week in line with the improved dynamics in the broader commodities sector.

Is it therefore any wonder the so-called commodity currencies that includes the Australian and Canadian Dollar's are outperforming?

China appears to be a key driver of the improvements in the commodities space, with data from FastMarkets shows that China’s bonded warehouse inventory of copper fell from around 339 kilo tonnes at the end of March to 296 kilo tonnes at the end of April, suggesting a pickup in usage of stockpiles owing to renewed economic activity.

China's economy leads the global recovery and as China is Australia's most important trading partner, this should ensure a fundamental demand for the Australian Dollar.

"The Australian Dollar should also disproportionately benefit from its greater sensitivity to China demand and, relatedly, its larger exposure to commodity prices as both recover," says Michael Cahill, foreign exchange analyst at Goldman Sachs.

The Australian Dollar is meanwhile also widely tipped to be an outperformer in a an evolving foreign exchange landscape that starts to reward the currencies of those economies that are ahead of the curve in terms of exiting states of lockdown and returning to full capacity.

"We expect that the main market driver in the weeks ahead will be whether countries will succeed in their exit plans from the lockdown," says Athanasios Vamvakidis, strategist at Bank of America Merrill Lynch. "Whether infection rates will continue falling, or increase will be key for markets, in our view."

"We know the lockdown was bad for the economy, and therefore any opening-up should be positive," adds Vamvakidis.

Both Australia and New Zealand last week took significant steps towards lifting lockdown measures now that infection rates of covid-19 have been drastically reduced, allowing authorities to more confidently pursue track-and-trace policies to stem any further outbreaks.

Above: Latest covid-19 snapshot for Australia

This contrasts to the slow exits being pursued by European nations (note the UK is only likely to set out exit plans on Sunday) and a seemingly incoherent exit being pursued by the United States.

"Both Australia and New Zealand have had relatively smaller coronavirus outbreaks than other countries and have now started easing lockdown restrictions. But we think Australia will be better positioned for the recovery given its relatively favourable fundamentals, including a stronger external balance, less exposure to net tourism, and better labor market protections," says Cahill.

At present the stars are in alignment for the Aussie Dollar but we would remind readers that caution will remain the watchword in an environment where the key concern is a global pandemic. But also watch renewed U.S.-China political tensions arising over the origins of the covid-19 pandemic, with the U.S. accusing China of a coverup when the virus first broke.

We saw China-linked financial classes - which includes AUD - underperform when U.S.-China tensions flared during the trade war of 2018-2019. This could well be an issue to consider for the remainder of 2020 as Trump appears to be resting part of his re-election campaign on a tough-on-China pedestal.

"Near term, focus in risk assets remains on US-China tensions, earnings reports and progress in the reopening of Western economies," says Kristoffer Kjær Lomholt, Senior Analyst at Danske Bank.