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The Pound to Australian Dollar exchange rate (GBPAUD) rallied sharply on Thursday and could be on course to test its 2023 high-water mark located at 1.9028 - or even beyond - amidst a broader pullback in the Aussie Dollar.
The Aussie has come under renewed pressure over the past 48 hours with investors eyeing unsupportive economic developments in China while lowering expectations for another interest rate hike at the Reserve Bank of Australia (RBA).
Chinese data continues to underwhelm resulting in a selloff in the Chinese Yuan, to which the Australian Dollar has a tight correlation courtesy of Australia's dependence on China as an export destination.
"Another significant theme in the market is the recent soft patch in China's economic data surprises. Our tracking of China's data surprises has witnessed a correction of nearly 2.5 standard deviations in just a few weeks," says Mark McCormick, Global Head of FX and EM Strategy at TD Securities.
To be sure, China's growth expectations and data trends remain robust, but McCormick says the drop in data surprises has revived discussions about the need for policy support in the world's second-largest economy.
"Recent China developments have served to cement the message that the robust growth momentum is now in the rear-view mirror," says Meera Chandan, a strategist at JP Morgan.
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Joseph Capurso, a strategist at Commonwealth Bank of Australia, says weakness in the Chinese Yuan and falling commodity prices will continue to weigh on the Australian Dollar "for the next few months".
"AUD/USD is closing on our end‑June forecast of 0.6400," says Joseph Capurso.
Such a move in AUD/USD would be in turn consistent with a rise in GBP/AUD that would test and then breach the 2023 high located at 1.9028.
Above: AUD/USD (top) with CBA's forecast target, and GBP/AUD.
The Australian Dollar has been trending lower against the Pound, Euro and U.S. Dollar in 2023 and the single most important development that could turn this trend would be a turnaround in China's growth impulse, something that doesn't look imminent at present.
The Aussie has meanwhile come under pressure over recent hours as investors lower expectations for future RBA interest rate hikes following the Reserve Bank of New Zealand's (RBNZ) announcement that it had effectively ended its own hiking cycle.
The New Zealand Dollar slumped sharply on Thursday after the RBNZ raised interest rates but surprised by saying it had now completed the cycle.
The fall in the New Zealand Dollar was severe and the Australian Dollar appears to have lost ground in sympathy.
The market is reckoning that the RBNZ's move provides the kind of cover needed by the RBA to also press pause on a more permanent basis.
For now, investors are expecting a further hike from the RBA, but CBA's Capurso says this is unlikely to be fulfilled, leading to further Aussie Dollar downside.
"The market’s reinsertion of a chance of a rate hike by the Reserve Bank of Australia will prove wrong," says Capurso. "An unwind of the hike will add another weight on AUD, though not as dramatic as the reassessment of the RBNZ had on NZD."
Further GBP/AUD strength is therefore preferred from here, particularly as the Bank of England appears to have little choice but to raise interest rates further following the release of stronger-than-expected UK inflation numbers.
The ONS reported Thursday that headline UK CPI inflation printed at 8.7% in the year to April, down from 10.1% in March, but well above the 8.3% reading the market was looking for and above the Bank of England's forecast for 8.4%.
Bond yields and Sterling initially rose in tandem as money markets revealed investors had raised their bets for the peak in the Bank of England's interest rate to 5.5% by year-end; this after core CPI inflation read at 6.8% year-on-year, which is above expectations for 6.2%.
The Pound soon erased gains against the Euro and Dollar, but extended them against the Australian and New Zealand Dollars.
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