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- GBP/AUD advances after China data misses expectations.

- Westpac looks for GBP/AUD to test 1.87 before end of June.

- Other analysts see AUD/USD stable above 0.70.

The Pound and other major currencies advanced on the Aussie Tuesday after surveys showed the Chinese manufacturing sector cooling in April, after recovering from recessionary levels in March, challenging the market's assumption growth in the world's second-largest economy is set to pick up pace.

Some analysts had hoped an economic pickup in China and other parts of Asia would lift Australian growth given the country's location in the Asia Pacific and its strong trade ties with China, but Tuesday's figures beg the question of whether the Chinese economy is even recovering at all.

"The no-change consensus looked high, with March upturn leaving the index above its previous downtrend. The weakness was caused by output, but the foreign trade story was more positive, or at least, less negative," says Freya Beamish, chief Asia economist at Pantheon Macroeconomics. "Overall, these data reveal some green shoots for future months, but underscore that China isn’t quite out of the woods yet."

China's official manufacturing PMI fell from 50.5 to 50.1 in April when markets had looked for it to increase to 50.7 for the current month. It had recovered from 49.2 in March. The IHS Markit Caixin PMI dipped from 50.8 to 50.2 when markets were looking for 51.0 in April.

The data is still indicative of some kind of recovery in the Chinese industrual sector although one that is playing out more slowly than markets had come to believe in the wake of last month's surveys, which is bad news for the Aussie because of its strong correlation with China's Renmimbi.

"The Australian dollar was the worst performing G10 currency overnight on the back of weaker Chinese PMI data," says Fritz Louw, a currency analyst at MUFG. "That such a small move was significant enough for the Aussie to be the worst performer is a testament to the low volatility environment we’re in at the moment."

Louw says Tuesday's data will stoke concerns that stimulus provided to the economy by the Chinese government in recent months is not having the desired effect, which is something that could threaten the newfound calm in financial markets if found to be true.

China's government has cut taxes and capital requirements for banks in an effort to get the economy back on its feet following the 2018 tariff fight with the White House, offering the markets a glimmer of hope that a recovery of Chinese demand will help boost economies in Europe and elsewhere.

"Market focus will again switch to a fresh round of trade talks that will commence between the US and China today," Louw writes, in a note to clients. "These talks will then be followed by a further round on the 8th of May and expectations at the moment are for a deal by mid-May. If positive momentum for a deal continues, this should support the Aussie going forward and help to keep it above the key 0.7000 floor."

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

"Our base case of GBP/USD roughly range-bound in the low 1.30s and AUD/USD slipping back to around 0.70 implies AUD/GBP returns to the 0.5325/50 area, GBP/AUD to 1.8700/50 by end-June," says Sean Callow, a strategist at Westpac, in a recent note to clients.

The Pound-to-Australian-Dollar rate was quoted 0.28% higher at 1.8381 Tuesday and is now up 1.57% this year, while the AUD/USD rate was quoted -0.17% lower at 0.7042 and is down -0.13% for 2019.

"AUD/USD last week eroded the 0.7004 March low, but has not yet closed below here and we are seeing a minor rebound into the 7060/.7106 band ahead of further weakness. Failure here should trigger a deeper sell off to the .6950 61.8% retracement," says Karen Jones, head of technical analysis at Commerzbank.

Above: AUD/USD rate shown at daily intervals.

MUFG's Louw is looking for signs of progress in the U.S-China trade talks to support the Australian Dollar over the coming weeks, and so too are domestic lenders like Westpac and Commonwealth Bank of Australia.

However, they are simply looking for the AUD/USD rate to hold above the key support level that is 0.70, rather than forecasting gains for the Antipodean unit. When combined with an anticipated recovery of the GBP/USD rate, this puts the Pound-to-Australian-Dollar rate on a path higher.

The main reason markets are so bearish in their outlook for the Aussie is because the Reserve Bank of Australia (RBA) is increasingly expected to cut its interest rate on two occassions this year.

The final nail in the coffin of Australian Dollar bulls was the first quarter inflation report, released last week, which showed the consumer price index falling to 1.3% last quarter, down from 1.8%, while the more important core-inflation rate dropped from 1.7% to 1.6%. The RBA needs both of these above 2%.

Above: Westpac graph showing market expectations of G10 interest rates. Australia shown in yellow.

Kit Juckes, chief FX strategist at Societe Generale, wrote to clients last week suggesting they should buy the Aussie if the AUD/USD rate closed above the 0.70 level on Friday. AUD/USD closed the week around 0.7035.

Martin Enlund, chief FX strategist at Nordea Markets, has meanwhile advocated clients position for a raise in the exchange rate and target a move above the 0.72 level over the coming months.

However, and so far, these recommendations are an exception rather than a rule, as the market remains pessimistic in its outlook for the Aussie.

And domestic lenders are less than upbeat too.

Strategists at Commonwealth Bank of Australia says they looking for the AUD/USD rate to remain close to 0.70 this week as housing-related economic data makes its way to the market.

Australian house prices are falling in the major cities, which has prompted fears of negative wealth effects that damage household confidence, deter spending and constrain economic growth.

Further out, CBA forecasts the AUD/USD rate will move sideways within a narrow 0.70-0.72 range over the coming quarters. Westpac, another big four Australian lender, also says the Australian Dollar will be lucky if it is able to put much distance between itself and the 0.70 threshold this year.

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