GBP/AUD technical setup is constructiveSustained advance above 1.9330 possibleChinese equity underperformance weighs on AUDU.S. data and broader USD trend also important

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The Australian Dollar continues to struggle, with the new week seeing some selling pressure linked to a poor showing in Chinese equity markets.

The Australian Dollar was softer against the majority of G10 peers in line with further declines in the Hang Seng index, which takes it to levels not seen since 2009.

The overall decline in Chinese stocks reflects a decision by commercial banks to keep their benchmark lending rates unchanged.

"This provided further disappointment for investors and follows a similar decision by the country’s central bank not to lower policy interest rates, amid wavering economic activity," says Nikesh Sawjani, Lloyds Bank.

The Australian Dollar is lower against the Pound, Dollar, Euro and the majority of G10 peers, apart from the New Zealand Dollar, reflecting a strong sensitivity to Chinese sentiment.

"AUD and NZD are among the worst performing G10 currencies YTD. Weak China data, a firm USD and unimpressive domestic data have not helped and will likely prevent near-term recovery," says a note from the FX strategy team at Barclays.

Australia's domestic calendar is empty this week, ensuring global sentiment and domestic trends will provide the guiding light.

From a technical perspective, the Pound to Australian Dollar exchange rate has now risen for four weeks in a row, and further advances can be anticipated as momentum indicators are positively configured.

We note that the exchange rate has broken above the 200-day moving average, which signals that the pair is now in an uptrend.

We also note, however, that the upper end of the preferred 2023 range has not been decisively breached, which hints at ongoing resistance in this area.

Above: GBP/AUD at daily intervals. Track GBP with your own custom rate alerts. Set Up Here.

Last week saw Pound-Australian Dollar peak at 1.9417, which put it above the 1.9330 band that forms the upper end of the sideways range.

However, the pair has subsequently retreated to 1.9264, putting it back below the upper end of the range.

We look for another attempt at a break of this region in the coming days, given the global trends that have dominated 2024 are expected to weigh on the Aussie in the near-term.

Besides China's lacklustre performance, the major global trend impacting the Aussie is the retreat in market expectations for the timing and scale of central bank interest rate cuts.

A retreat in Federal Reserve rate cut bets has been particularly notable, weighing on equities and 'high beta' financial assets such as the Australian Dollar.

This is because rate cuts are seen as pro-growth, boosting stocks and commodities, assets to which AUD is positively aligned.

"The high-yielding, safe-haven USD has regained ground across the board of late as central banks’ concerted push back against overly dovish market expectations has finally started to bear fruit," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

"Higher US and global yields have weighed on risk assets, resulting in tighter global financial conditions, burnishing the currency’s safe-haven appeal," he adds.

Crucially, he says this trade that supports the Dollar has further to run:

"With the U.S. rates markets still attaching a c.50% chance to a Fed cut in March and pricing in c.130bp worth of rate cuts in 2024, we believe that the reassessment of the dovish market expectations is not over yet."

This week's excitement in the U.S. falls on Thursday with the release of GDP and the PCE inflation gauge.