- AUD/USD lower amid Fed disappointment following new 2020 highs.

- GBP/AUD in recovery mode as risk rally stalls, with scope to hit 1.90.

- Brexit can kicking, UK reopening revive GBP/AUD correlation with risk.

- New business cycle, domestic risks favour lower GBP/AUD further out.

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Australia's Dollar was lower against most rivals Thursday and tipped for a period of consolidation after the June Federal Reserve (Fed) policy update provoked a wave of profit-taking across markets that's offered a beleaguered Pound-to-Australian Dollar exchange rate some momentary relief.

The Aussie Dollar was in universal retreat Thursday after Asian stock markets followed North American counterparts lower in the overnight session as the June Fed policy update left investors with little reason to chase risk assets higher.

This was after Fed left its interest rate and the settings of its various crisis-related programmes unchanged on Wednesday, in line with expectations, but said little about how they're likely to evolve as the year draws on.

Some in the market had hoped the bank would lay the foundations for adopting a so-called yield-curve-control policy as a means of keeping bond yields under pressure and financial conditions for companies and households as loose as possible while they navigate the road to recovery. In the end the Fed offered to meet the market in the middle and it wasn't enough to sustain the bid that had carried stock markets several percentage points higher in the last week alone.

Australia's Dollar is the most sensitive among major currencies to price action in those markets so was wobbled when they turned lower after the Fed's first post-crisis economic forecasts and its pledge to continue buying U.S. government bonds "at least at the current pace" in the months ahead. That's a de facto commitment to yield-curve-control just not as explicit a commitment as markets would have liked, and it lacks an obvious target for investors to focus on.

Above: Pound-to-Australian Dollar rate shown at 4-hour intervals alongside AUD/USD (orange line)

"The Fed noted that financial conditions have improved, limiting the need for further action in the near term. But it is clearly willing to do what is necessary, with unlimited QE giving it options," says Daniel Been, head of FX research at ANZ. "Given the recent run in the AUD, consolidation is expected in the near term, with eyes on risk markets for direction."

AUD/USD had risen more than 8% in the fortnight to June 10 amid declining new coronavirus infection numbers and increased efforts to reopen economies in developed markets that had fueled the rally in stock and commodity markets.

This week's gains saw it set a fresh 2020 high but the Fed's decision to largely sit back and observe the results of its work to date has encouraged a correction that had already begun before the announcement.

An environment where risk assets like stocks and commodities are correcting the lower is a boon for the Pound-to-Australian Dollar rate now that Brexit negotiators have agreed to extend trade talks through the summer, rather than calling them off this month as the UK side had said it would should progress remain lacking into this month. That, British government efforts to close the gap with developed world peers on reopening the economy and the stock market correction have taken some of the pressure off of GBP/AUD.

"For AUD, sensitivity to SPX has been remarkably high and a standout story in G10 FX. Its SPX beta has steadily risen from 0.30 in the initial stages of the market rally to nearly 0.60 at present, meaning that a 10% rise in SPX has mapped to about a 6% rise in AUD/USD on average, about the 90th percentile historically," says Ben Randol, a strategist at BofA Global Research.

Above: AUD/USD rate shown at daily intervals alongside S&P 500 stock index (orange line) and 200-day moving-average.

"The fall is consistent with our view that AUD/USD is likely to consolidate in the coming months after a v‑shaped recovery," says Carol Kong, a strategist at Commonwealth Bank of Australia. "The outlook for a trade deal between the EU and the UK remains bleak...The lack of compromise by both parties increases the risk of a no‑deal Brexit, weighing on GBP."

Brexit talks remain deadlocked so a trade relationship governed by World Trade Organization (WTO) terms cannot be ruled out for the months ahead but the fact the talks are still ongoing keeps the market clinging on for a compromise and renders the 'no deal Brexit' story one for another day. That and the UK's slowcoach path out of 'lockdown' had seen the Pound underperforming the Aussie through May on both the good days and the bad for risk assets, an unusual state of affairs for the GBP/AUD rate.

But lesser immediate domestic headwinds have in the last fortnight, enabled the traditional negative correlation between with risk appetite to reassert itself on the Pound-to-Australian Dollar rate. This offers momentary relief to Sterling given the correction in risk assets and AUD/USD. The GBP/USD rate was also undergoing a correction Thursday but losses for AUD/USD were greater and so put Pound-to-Australian Dollar rate in recovery mode.

Above: Pound-to-Australian Dollar rate shown at daily intervals with 200-day moving-average.

"GBP/USD has rallied to the 78.6% retracement at 1.2818 (of the move down from the March peak), which has so far provoked failure," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, before turning to AUD/USD. "Currently we would allow for a corrective dip back very near term. Loss of the 3 month uptrend at .6798 would add weight to that view. Key support is offered by the 2 month uptrend at .6559 and this maintains an upside bias."

Jones looks for continued corrections in GBP/USD and AUD/USD to around 1.2468 and 0.6559 respectively which, when combined, could lift the Pound-to-Australian Dollar rate back to the 1.90 level and some 3.6% above Thursday's 1.82. GBP/AUD is an amalgamation of the former exchange rates and would also be found trading around 1.90 in the event the aforementioned corrections took GBP/USD and AUD/USD even further back, to 1.2363 and 0.6473.

The Pound-to-Australian Dollar rate has fallen sharply in recent months, taking it some -12.8% below its early April peak and more than six percent below its level on April 28 when the prospect of more protracted declines was first flagged by Pound Sterling Live. Nonetheless, the exchange rate remains above its long-term and post-referendum average at the beginning of a new business cycle that would always favour the Aussie over Sterling and as a series of domestic headwinds lurk around the corner in the UK.

Long-established correlations suggest a recovery that births the beginning of a new global economic cycle would enough to put the Pound-to-Australian Dollar rate in retreat later this year even without a Bank of England (BoE) that's grown curious about the perceived merits of a negative interest rate policy, not to mention the lingering prospect of something like a 'no deal Brexit' at year-end.

Above: Pound-to-Australian Dollar rate shown at weekly intervals with 200-week moving-average.