- Powell testimony greases AUD gains

- Uptick in Aussie wages helps

- AUD/USD can advance further

- GBP/AUD resists AUD's broader advance

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GBP/AUD spot at publication: 1.7875Bank transfer rates (indicative guide): 1.7246-1.7372Money transfer specialist rates (indicative): 1.7418-1.7747More information on securing specialist rates, hereThe Australian Dollar reached new three-year highs against the Australian Dollar but was kept in check by a dominant Pound following market-supporting comments from the U.S. Federal Reserve's Jerome Powell as well as decent wage numbers out of Australia.

The Australian Dollar found support after Powell told lawmakers that the Fed intends to let the U.S. economy to run hot in the short-term and temporary inflation due to the pandemic should be ignored.

Powell kept alive the prospect of ongoing monetary support from the Fed into the foreseeable future, ensuing a crucial ingredient of an ongoing equity and commodity market rally remains in place.

Interest rates will remain low and the Fed’s $120BNn per month bond purchases will continue "at least at the current pace until we make substantial further progress towards our goals… which we have not really been making," said Powell.

"The G10 laggards are the yen and Swiss franc, the G10 winners are AUD, GBP, NZD, CAD, NOK and SEK," says Kit Juckes, a foreign exchange analyst at Société Générale. "The G10 currencies which ought to benefit most easily from a very dovish Fed are still the ones sensitive to real estate - AUD, NZD and CAD. AUD is the most fashionable but also the one when RSIs are stretched."

Above: The Australian Dollar is the best performing G10 currency of the past year.

The global backdrop remains a key driver of Australian outperformance that means it is the top-performing G10 currency of the past year, rising 20.00% against the U.S. Dollar, 10% against the Pound and 7.0% against the Euro.

Expectations for a strong economic rebound in 2021, combined with ongoing support for central banks and governments, provide ideal conditions for pro-cyclical currencies such as the Aussie Dollar to advance.

"I see stocks selling off in response to much higher yields as the only real challenger for the high beta G10 rally and given how stocks rallied back yesterday without Powell saying a great deal, I remain very positive on the asset class," says a trader note from JP Morgan's London trading desk.

The Pound-to-Australian Dollar exchange rate (GBP/AUD) has nevertheless risen this week courtesy of strong investor demand for Sterling, which we note has caught many analysts off guard.

Australian Dollar strength is clearly evident against the U.S. Dollar, with the Australian Dollar-to-U.S. Dollar exchange rate rallying up to a new three-year high at 0.7945.

"Overall, AUD/USD has room to rally towards 0.8200 underpinned by the encouraging global economic outlook and Australia’s favourable balance of payments backdrop. Also, stay short EUR/AUD," says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia (CBA).

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GBP/AUD Forecasts Q2 2023 Period: Q2 2023 Onwards Details: Consensus institutional forecast targets + max & min targets. Contributors: Citi, Barclays, Morgan Stanley & more Provider: Global Reach Type: Free Download Please Access Here

{wbamp-hide end}{wbamp-show start}{wbamp-show end}"AUD/USD is firmer on-the-day, supported by a softer USD and confirmation of policy support for reflation expectations. We maintain a positive view, though after strong gains in recent days, will be more comfortable entering or adding to longs after some consolidation. Major AUD/USD support is 0.7820-60," says Patrick Bennett, an analyst with CIBC Capital Markets.

CitiFX strategists maintain that the Fed's dovish stance, the strengthening global recovery and the major decline in the Treasury General Account balance in coming months support broader reflation trend over time.

They say strong reflation and low U.S. real yields should still push the Dollar lower, and it is notable that the Dollar has not materially appreciated recently even as U.S. nominal and real rates move up.

In the short-term, however, the size of the rates moves indicates uncertainty and the potential for volatility - including in FX, they say.

On the domestic front, data has been somewhat supportive of the local unit.

Australia wages growth rose by more than the market expected with the wage price index rising by 0.6% in the fourth quarter 2020 to be up 1.4% over the year.

"The strong wages outcome partly reflected the unwinding of temporary pay reductions for some workers," says Kristina Clifton, Senior Economist at CBA.

The ABS reported private sector wages rose by 0.7%, with the professional, scientific and technical services sectors providing an uplift of 1.2% in the quarter.

"It’s more likely to be a one-off ‘pop’ in the quarterly data rather than the start of any meaningful trend higher in wages," says Clifton.

CBA expect to see soft wages growth over the next couple of years and say there will be excess slack in the labour market for some time yet (i.e. there will be enough labour on supply to keep wages from running higher)

The RBA pointed out recently that the fourth quarter saw a rise in the number of private firms indicating they intend to implement wage freezes.

Public sector wage caps will also weigh on wages growth outcomes says CBA.

Image courtesy of CBA.