- CBA lower AUD forecasts near-term

- But expect AUD to outperform in 2020

- See limited GBP/AUD upside

© Taras Vyshnya, Adobe Stock

GBP/AUD spot rate at time of writing: 1.8170Bank transfer rate (indicative guide): 1.7525-1.7675FX specialist providers (indicative guide): 1.7915-1.8020More information on FX specialist rates hereThe Australian Dollar could turn lower in coming weeks as the risk of a double-dip U.S. recession builds, according to new forecasts from Commonwealth Bank of Australia (CBA) who have lowered near-term forecasts for the currency but maintain a view 2021 will see it outperform.

The Aussie Dollar struggled in mid-week trade in sympathy with a fall in stock markets amidst uncertainty about the near-term outlook for the U.S. and global economies in the short-term owing to the spike in covid-19 infections, a move that confirms the currency's positive correlation with investor sentiment.

The Pound-to-Australian Dollar rate is seen rising to 1.8378 over the coming weeks by CBA if a Brexit trade agreement is struck with the EU, only to slip lower again in susbequent months as the Aussie resumes its upward climb against rivals.

"We forecast AUD/GBP to decline modestly in the near term," says Kim Mundy, a strategist at CBA (note she is referencing the AUD/GBP as opposed to GBP/AUD).

"AUD/GBP could lift materially if the BoE cuts interest rates below zero. However, there is no precedent of a currency reaction to a negative policy interest rate for an economy with a large current account deficit like the UK. Another large uncertainty for AUD/GBP is whether the UK and the EU can agree on a trade deal, and the impact on the UK economy."

Above: Pound-to-Australian Dollar rate struggles to get above 23.6% Fibonacci retracement of April sell-off, at 1.8286.

With the UK economy likely navigating its way into a new trade relationship with Europe in the New Year, the Pound will remain at risk of fresh interest rate cuts from the Bank of England (BoE), which has recently become the problem child among major economy central banks.

Financial market interest rate expectations for the BoE were the most 'dovish' out of all major economy central banks on Wednesday, according to pricing in the overnight-index-swap market, which implied that a -10 basis point rate cut would take Bank Rate down to 0% by June 2021.

Market pricing for months further into next year and out in 2022 also implied a lingering risk that interest rates fall below zero. The BoE has warned repeatedly this year that negative interest rates are a possibility but much depends on the outcome of Brexit talks, which could be known within days.

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Such levels of GBP/USD would lift the GBP/AUD cross rate if the Aussie remained unchanged against the U.S. Dollar around Wednesday's rate of 0.7350.

But CBA says support for the Pound-to-Australian Dollar rate is unlikely over the longer term.

"Concerns over the global economic outlook are a weight on AUD/GBP in the near-term. However, we expect AUD/GBP will lift into 2022 in line with the recovery in the global economy. A brighter global economy and strong Chinese demand for Australian commodities will underpin AUD/GBP," Mundy says.

Above: AUD/GBP rate shown alongside iron ore (key Australian export) price. Source: CBA.

Somewhat counterintuitively for a commodity-sensitive currency, Australia's Dollar was reborn this year in the bust of the global economy brought on by the coronavirus, which has also birthed a new economic cycle which begins with a recovery that is led by China, Australia's largest export market.

New global economic cycles typically favour commodity prices and the currencies of commodity producers. 2020 has been no different, with AUD/USD rising more than 30% from the financial crisis era lows seen in late March, although the rally has stalled of late and there's reason for it to remain so in the short-term at least.

A second wave of coronavirus infections led to the partial reclosure of major European economies in early November, although as the month has progressed parts of the U.S. has also begun to order some types of business to shut again, leading to fears of a double-dip recession that engulfs the European as well as North American continents.

"Two vaccines are likely to be available in some economies as early as next month. But US recession risks that cause a correction in global equity markets will likely bear down on AUD/USD, and AUD/JPY in particular. While there are downside risks to AUD in the near term, the medium term outlook is very positive because of China’s v‑shaped economic recovery," says Joseph Capurso, a CBA colleague of Mundy's, in a recent note. "We now forecast AUD/USD will end 2020 at 0.74 (previously 0.75) and end 2021 at 0.78 (unchanged). An improved outlook for the global economy is behind our slightly stronger AUD forecasts in 2022."

Above: AUD/USD at daily intervals with 200-day average. Reverses before 100% retracement of Sept 2020 correction lower.