-GBP/AUD falls Friday but range-bound trading to prevail, say Westpac.

-AUD growth, hawkish BoE to keep GBP/AUD confined to ranges in Q3.

-But final quarter sees GBP/AUD break lower, with 5% downside likely.

© Rawpixel.com, Adobe Stock

The Pound-to-Australian-Dollar rate fell Friday although it remains in the middle of a three-month range that will define trading in the currency pair through the third quarter, according to strategists at Sydney-headquartered Westpac Banking Corporation.

Australia's Dollar is trading at a 4% loss against the Pound for 2018 and has fallen by similar measures relative to all developed world currencies, but the worst may now be over as Westpac strategists are forecasting range bound trading for the currency in the coming months, followed by a gradual recovery until year-end.

"The Aussie outperformed a wide range of currencies in May, but especially the British pound," says Sean Callow, a senior FX strategist at Westpac. "June was more mixed, with AUD losing some momentum as trade tensions picked up again and as the BoE MPC appeared to be closer than assumed to another hike, with a 6-3 split for a steady hand. Notably, Chief Economist Haldane delivered the first dissent by a BoE insider since 2011."

Price action in the Pound-to-Aussie rate during June highlighted the litany of challenges faced by the Australian Dollar this year, with an increase in risk aversion having placed broad pressure on global-growth-sensitive currencies like the Aussie while the latest evolution in UK monetary policy placed the Reserve Bank of Australia's "on hold" interest rate stance back in spotlight too.

The Reserve Bank of Australia has now held its rate at a record low of 1.5% for nearly two years, citing below-target inflation and a debt laden household sector that it says is ill-equipped to handle the pressures of higher borrowing costs following years of weak wage growth.

Meanwhile, the Bank of England has signalled that it could raise interest rates at its August meeting now the economy has shown signs of getting over its first-quarter slowdown. The Federal Reserve and other central banks also remain on a so called "hawkish" footing, with further rate rises anticipated during the months ahead.

"AUD’s yield premium has trended lower since Sep 2017 when the BoE MPC struck a hawkish note, paving the way for the rate rise that was delivered in November 2017," Callow writes, in a note to clients Friday. "AUD’s yield advantage remains low in historical context."

This, and dampened risk appetites amid concerns over President Donald Trump's trade war, has incentivised investors to sell the Australian Dollar in favour of buying Pounds, US Dollars and other currencies. The Aussie has long enjoyed support from interest rates that were typically higher than those elsewhere in the developed world although this is changing now.

President Donald Trump is pursuing restrictive legislation to govern investments into the United States from China, which is Australia's largest trading partner, and recently ordered that a range of tariffs be levied against imports of more than $250 billion in American imports of Chinese goods. These tariffs come into force on July 06, although earlier levies on imports of steel and aluminium from China, Canada, Mexico and the European Union are already in force.

The moves so far have drawn retaliation and threats of even further reciprocal measures from the Chinese. Fears are that a tit-for-tat tariff fight between the world's largest economies will quickly descend into an all out "trade war" and that this will dent economic growth in all countries it touches, which could stymy the Federal Reserve from raising its interest rate further while also denting the odds that other central banks will be able to raise their rates any time soon.

"Looking forward, AUD should find support from the RBA’s optimistic outlook and broadly resilient commodity prices. AUD is also probably already pricing in ongoing US-China trade tensions," says Callow "But sterling losses against the Aussie should be constrained by the BoE’s swing back towards planning a rate rise, at least so long as UK data holds up ahead of the 2 August MPC meeting. This suggests GBP/AUD rallies run out of steam into 1.83 but that the pair finds support ahead of 1.75 multi-week."

The Pound-to-Australian-Dollar rate was quoted 0.27% lower at 1.7850 Friday and is now up by just 3.5% for 2018. Callow and the Westpac FX team forecast the pair will finish the 2018 year around the 1.71 level, which implies some 5% downside before year-end. The AUD/USD rate was quoted 0.39% higher at 0.7414 and is forecast to finish the year around its current level.

Advertisement

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here