- GBP/AUD hits short-term resistance

- GBP better supported over recent weeks on Brexit, economic recovery

- However AUD has arguably more favourable fundamental sources of support

- Aus reports record iron ore shipments in July

Exports of raw commodities from Australia continues to underpin AUD. Image © Adobe Stock

GBP/AUD spot rate at time of writing: 1.8257Bank transfer rates (indicative guide): 1.7618-1.7746FX specialist rates (indicative guide): 1.7817-1.8093For more information on market beating rates, please see hereThe Pound underwent a 0.44% advance against the Australian Dollar on Thursday, but the rally ultimately failed at the 1.83 level and the GBP/AUD exchange rate has since pared its gains to quote at 1.8250 at the time of writing.

The area around 1.83 looks to have established itself as a short-term resistance point; indeed the daily chart shows it has rejected GBP/AUD advances for five consecutive days now and we would imagine that unless a notable event sparked broader foreign exchange moves ahead of the weekend it will continue to form a near-term barrier:

Above: Four hour chart of GBP/AUD

While there is some resistance up ahead, we note the broader tone to the GBP/AUD setup is supportive of Sterling in the near-term: we observe the Relative Strength Index (RSI), a measure of momentum, is positive at 55.25 and therefore advocating for further upside in GBP/AUD, meanwhile the exchange rate is also trading above its 50 day moving average at 1.8107 which is a further bullish signal.

We would look for a fall below the 50 day moving average to signal that the short-term rebound, that has been in place since July 22, is breaking down.

The GBP/AUD has rallied over recent weeks courtesy of a broad-based improvement in Sterling markets which had been under pressure heading into July. We note that the recovery in the Pound has no single driver, rather we observe some supportive developments that in their totality underpin the Pound.

While the broadly weaker U.S. Dollar has aided Sterling higher, it can also be said it has aided the Australian Dollar too and we therefore would look for other Sterling-specific drivers to understand recent strength, and whether or not it can extend.

While EU-UK Brexit trade negotiation talks have yet to yield a breakthrough and remains an important source of concern for investors, it does appear negotiators are intent on finding a way forward, and the extension of talks in late July confirmed this willingness to find a deal.

We believe markets have been cautiously raising their expectations for a 'bare bones' trade deal to be struck by around October, and this has aided Sterling.

UK chief negotiator David Frost said on Thursday that a Brexit agreement can be reached with the European Union in September.

"As we keep saying, we are not looking for a special or unique agreement. We want a deal with, at its core, an FTA like those the EU has agreed with other friendly countries, like Canada," said Frost. "The UK’s sovereignty, over our laws, our courts, or our fishing waters, is of course not up for discussion and we will not accept anything which compromises it - just as we aren’t looking for anything which threatens the integrity of the EU’s single market."

The suggestion by Frost that there is the prospect of a September deal comes ahead of another round of negotiations next week and should serve a reminder that the two sides remain committed to reaching a deal, even if they maintain a cautious stance on such an outcome.

"The negotiations for a post-Brexit deal have apparently been more successful behind closed doors than on the main stage. Markets seem, however, quite relaxed for the time being. We do currently not see any Brexit obstacles on the horizon that could derail the GBP," says Thomas Flury, Strategist at UBS.

Another potential driver of Sterling's recent performance is the view that the UK economic recovery is starting to pick up some pace after it suffered one of the deepest recessions, if not the deepest, of the developed world in the first half of 2020.

The UK economy was one of the last to lockdown but it endured a longer lockdown than many of its peers which was a particularly sizeable blow for an economy that is constituted 80%+ of services.

But, with early July seeing the opening of pubs, restaurants, hotels and other elements of the services sector, the economy should pick up some speed into the second half of the year.

How the recovery compares to the recoveries of other economies matters when it comes to exchange rates, as we are in a world where economic outperformance is beginning to matter again and this could be one angle to consider when approaching GBP/AUD over coming weeks.

The OECD gathers timely economic data from the world's largest economies and compiles it into its Composite Leading Indicator which gives a view of major turning points in an economic cycle and allows us to see how economies are performing relative to each other. The below shoes the Composite Leading Indicators for the UK, US, Eurozone and Australia:

What the above tells us is the UK has recently seen its recovery accelerate and this is one potential explanation for Sterling's better performance since around July 22.

But looking at Australia, we see the dynamics are supportive, particularly since the initial dip was so shallow. With the data from the OECD incomplete at the current time we would imagine that the recovery has only improved of late and this could well underpin Aussie Dollar valuations.

Indeed this week Australia reported strong employment figures for July as more Australians found work, despite escalating COVID-19 infections in Victoria.

Employment rose 114.7k, the second largest monthly increase on record, trailing only the 228.4k increase registered in June. Nevertheless, employment remains 532k (or 4.1%) below its February level.

"The unemployment rate continued its upward trajectory as more Australians entered the labour force. There was a 0.1 percentage point increase in the unemployment rate to 7.5% in July, the highest since November 1998," says Besa Deda, Chief Economist at St. George Bank in Sydney.

The participation rate recorded another increase to 64.7% in July from 64.1% in June, as more potential workers re-joined the labour force.

Other measures of the labour market were encouraging. Hours worked increased by 1.3% in July after rising 4.2% in June. Underemployment decreased for the third consecutive month to 11.2% in July, further below the peak of 13.8% in April.

"The further rebound in jobs and hours worked is an encouraging indication that the labour market recovery that started in June maintained momentum in July. However, August will be a sterner test as Victoria entered a stage 4 lockdown and growing clusters emerged in NSW. We expect that the unemployment rate will rise further and will stay high for some time," says Deda.

But the more important driver for Australia is arguably the global picture, namely the performance of stock markets and commodity markets.

The S&P 500 - which the Australian Dollar is highly correlated with - this week reached the levels it was at back in February before the onset of the coronacrisis market meltdown which makes for an impressive recovery.

The Australian Dollar has perhaps the highest beta in the G10 space, meaning it has the highest correlation with the S&P 500, and further gains in this stock market would ultimately be supportive of the currency.

Also keep an eye on the recovery of commodity prices, particularly iron ore, coal, copper, zinc and natural gas which are all major Australian exports.

Significant stimulus measures in China aimed at boosting the post-covid recovery have seen demand for commodities surge, and with supply disruptions in Brazil, Australia has been mopped up the market.

Indeed, Port Hedland iron ore shipments reached their highest ever level in July after they totalled 43.6mt, according to the Pilbara Ports Authority.

Total exports via Port Hedland hit an all-time high of 51.8mt in June, compared to 41.0mt last month.

Year-to-date exports totalled 314.49mt vs 295.44mt over the same period last year according to data from Bloomberg.

"Benchmark spot prices have surged as high as $122/t this year, due to robust demand from Chinese mills and supply worries from countries. along with port logistics issues in China," says John Meyer at brokerage SP Angel.

However, some questions are starting to be asked as to just how further commodity prices can travel as we move through the early stages of the second half of 2020. "Copper and zinc prices have rallied sharply in the past couple of months, as Chinese demand has been robust and mining production has taken a hit as Covid-19 has swept through key mining countries in South America. The upside for prices now looks limited.," says Ben May, Director of Global Macroeconomic Research at Oxford Economics.

The dynamics underpinning the Australian Dollar are ultimately firm and we would therefore suggest further advances in the Pound-Australian Dollar exchange rate will be hard to come by unless a surge of exuberance towards Sterling materialised, which is something we would not expect unless a market-friendly EU-UK trade deal was reached in coming months.

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