- GBP/AUD on front foot amid broad GBP gains

- But USD fall, AUD lift-off curbs GBP’s upside

- Poses downside risk to 1.78-to-18050 range

Image © Adobe Images

GBP/AUD rate at publication: 1.7935Bank transfer rates (indicative guide): 1.7309-1.7435Money transfer specialist rates (indicative): 1.7811More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Pound-to-Australian Dollar rate advanced early in the new week amid widespread gains for Sterling, although an ongoing decline in U.S. Dollar exchange rates poses downside risks to GBP/AUD’s current 1.78-to-1.8050 range up ahead.

Pound Sterling advanced broadly on Monday, seemingly drawing a line under its poor performance from the latter half of the last week, with the Pound-to-Australian Dollar rate trading as high as 1.7932 before ebbing.

UK elections passed without any major event at the weekend, which could potentially explain the early doors gains by the Pound, although Sterling exchange rates like GBP/AUD and GBP/CAD have corresponded most closely of late with the trajectory of the trade-weighted U.S. Dollar.

“When we delve in to the USD’s intraday behaviour vis-à-vis equities and rates we find that most of the USD’s downside in recent weeks has come from a recalibration in Fed policy expectations, more so than any other factor,” says Richard Franulovich, head of FX strategy at Westpac.

This is important for the GBP/AUD outlook because, with a tepid bounce in the early hours of Monday aside, the U.S. Dollar is widely billed as being on the cusp of what looks to be a slow and steady turn lower.

Above: GBP/AUD at hourly intervals with AUD/USD (yellow) and EUR/USD (green).

As a result, and although Wednesday’s first-quarter UK GDP data will be of interest to Sterling, international appetite for the greenback could be the most important determinant of price action in GBP/AUD over the coming weeks.

“AUD/USD has breached the 0.78 area in the spot market but largely as a result of USD weakness,” says Jane Foley, senior FX strategist at Rabobank.

The Dollar turn lower has lifted many U.S.-facing exchange rates including GBP/USD and EUR/USD although most notably for the Pound-to-Australian Dollar outlook; AUD/USD has risen above and beyond the 0.78 handle that successfully frustrated the antipodean currency from March 01.

AUD/USD had several times failed to get back above the level since then, which was also the point when the greenback began to draw support from a bonfire in the U.S. bond market that lifted American yields as well as the greenback.

{wbamp-hide start}

“USD is building on its post‑non‑farm payrolls losses. Slower US employment growth reinforces the FOMC’s ultra‑dovish policy guidance. This means US real yields can turn more negative and further weigh on USD,” says Elias Haddad, a senior FX strategist at Commonwealth Bank of Australia.

U.S. Dollars have been sold with Euros, Australian Dollars and a range of other currencies bought heavily since April’s non-farm payrolls data vindicated the Federal Reserve (Fed) on Friday for its insistence that the U.S. remains a long way off from the job and inflation targets the bank wants to achieve before it entertains changes to its globally supportive monetary policy.

Above: GBP/AUD at daily intervals with AUD/USD (yellow) and EUR/USD (green).

Job growth was nothing to be sniffed at however, given that before pandemic times a 266k payrolls increase would have been celebrated as a blockbuster in some parts of the market, even if it was not enough on Friday to satisfy lofty expectations of both the market and the Fed.

To the extent that this U.S. downturn continues, it could remain an uplifting influence on AUD/USD and other currencies over the coming weeks, which would be a weight around the ankles of GBP/AUD given the recent correlation between many Sterling exchange rates and those of the U.S. Dollar.

The Pound-to-Australian Dollar rate has traded within a 1.78-to-1.8050 range over the last week although, if anything, this range might be likely to adjust lower as the U.S. Dollar declines while AUD/USD, EUR/USD, GBP/USD and other exchange rates edge higher.

“AUD/USD has plenty of room to edge higher as iron ore prices surged to new highs on increased steel prices in China. Stay long AUD/USD and target 0.8200,” CBA’s Haddad says.

“The USD’s choppy downtrend can continue this week. The improving global economic outlook is a medium term weight on the USD. But signs of stronger US inflation and/or concerns about global coronavirus cases can spark short‑lived bouts of USD strength.”