Pound / Australian Dollar Rate Looks to Hold 1.85 into New Year

GBP/AUD supported at 1.85 & looking to rise further
But upside limited to 1.8750 amid AUD/USD rebound
After global sentiment, PBoC & RBA policy rejuvenate
The Pound to Australian Dollar rate recovery has been tempered by a concurrent rebound in the all-important AUD/USD rate that could lead Sterling to give up the recently recovered 1.85 level if it continues into the new year.

Sterling was one of the best performing major currencies during the week to Wednesday but the Pound-to-Australian Dollar rate’s advance was frustrated when AUD/USD extended its December recovery.

Australia’s Dollar rallied back above 0.72 this week, continuing its recovery from an earlier dip beneath 0.70 and prompting the Pound-Australian Dollar rate to fail in its latest attempt to climb back above 1.86.

“We’re seeing some demand in recent sessions as risk appetite comes back (helped along by China stimulus news), but overall, the Australian Dollar is under pressure into year end, mostly on the back of diverging Fed/RBA policy,” says Joel Kruger, chief market strategist at LMAX Exchange Group.

“The Australian Dollar has been in the process of a healthy correction following the impressive run towards a retest of the 2018 high earlier this year. At this stage, the correction is starting to look stretched and setbacks should be well supported above 0.7000 on a weekly close basis,” Kruger adds.
GBP/AUD reference rates at publication:
Spot: 1.8590
High street bank rates (indicative band): 1.7938-1.8069
Payment specialist rates (indicative band): 1.8460-1.8490
Find out about specialist rates, here
Set up an exchange rate alert, here
Australian Dollar gains were aided over the festive period when the Peoples’ Bank of China (PBoC) made a ‘dovish’ commitment to easing financial conditions in the world’s second largest economy, helping to sustain AUD/USD on its front foot while keeping the Pound-Australian Dollar rate under wraps beneath 1.86.

AUD/USD’s recovery has left a bullish impression on the charts and may have set the stage for an eventual reclamation of 0.73, according to some technical analysts, which would be a headwind for GBP/AUD.

“Next key resistances are seen at .7200/10, above which would confirm a correction up to .7292/7303, with only a closing break above here negating the top, which is not our base case,” says David Sneddon, head of technical analysis trading strategy at Credit Suisse.

“Given the broader negative trend setup, we are still biased toward an eventual turn back lower post this recovery, with a retest of next support at .6992/9 1 confirmed with a move below .7092/89,” Sneddon wrote in a pre-holiday review of the Aussie’s charts.
The Pound-Aussie rate always closely reflects the relative performances of AUD/USD and GBP/USD, and would risk falling back to December lows near 1.84 in the event of an AUD/USD recovery to 0.73.

However, Credit Suisse’s Sneddon is doubtful the antipodean currency will make it that far and instead expects the recovery will end with a turn lower toward 0.7092 over the coming weeks.

This would be supportive of the Pound-Australian Dollar rate and could potentially lead it to rise as far as 1.9750, although much about price action in Australian Dollar exchange rates will depend in the new year on the market’s reading of an evolving RBA monetary policy outlook.

“The medium-term outlook is uncertain for AUD, as Citi Economics maintains a benign view on local inflation and the RBA’s reactions to it,” says Valery Berenshtein, an analyst at Citi FXWire, writing in a note last Thursday.
The Australian Dollar’s resilience against Sterling and recovery against the U.S. Dollar dates back to early December when the Reserve Bank of Australia’s (RBA) suggested that its A$4BN per week quantitative easing programme could end as soon as February.

The RBA had been expected to merely reduce the value of weekly bond purchases carried out under the programme so the prospect of an all-out curtailment was a surprise for the market.

However, the rub for the Australian Dollar rate and silver lining for the Sterling-Aussie rate is that RBA guidance still suggests the bank could be one of the last in the major economy sphere to begin lifting interest rates coming out of the coronavirus crisis.

Meanwhile, the Bank of England (BoE) already began its process of policy normalisation in December when it lifted Bank Rate from 0.10% to 0.25% in what has already been a supportive development for Sterling and the Pound-Australian Dollar rate.

“The recent shift from the Fed to accelerate the withdrawal of policy support gives the RBA more flexibility to speed up the tapering of bond purchases. On the cash rate, the RBA repeated it is “prepared to be patient,” says Matthew Bunny, an economist at St George Bank.