– GBP / AUD expects the 8th daily advance in a row
– GBP could outperform UK's key local Covid 19 lockdowns
– AUD is waiting for RBA decision
Image © Greg Brave, Adobe Stock
- GBP / AUD spot rate at the time of writing: 1.8380
- Bank transfer rate (benchmark): 1.7755-1.7880
- FX specialty provider (indicative guide): 1.7970-1.8230
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The pound rose seven days against the Australian dollar, and further progress is underway on the first full day of trading in August to underline the view that the recent rally was not just a month-end phenomenon.
The GBP / AUD exchange rate rose another third to 1.8379 at the start of the new week and month, contributing to the 1.74% increase in the past week.
The weekly charts suggest that the pair may be based at 1.7948, with the sharp losses in the April-June period easing in late June and allowing a base to develop from which a broader recovery could develop.
Above: GBP / AUD weekly chart
This recovery now seems to be in progress, and we would look for further progress as the daily dynamics based on various technical metrics, which include an RSI at 65, now appear constructive and firmly in the positive bracket.
The sterling outperformance continues to split the analyst community. Some say the UK currency is outperforming due to recent better than expected economic performance, while others say the prospect of a Brexit trade deal in October is a reason to ease currency negativity again.
An interesting point of view is Marshall Gittler, head of investment research at BDSwiss Group, who notes that the UK's proactive approach to curbing the Covid-19 pandemic could be a reason for Sterling's recent outperformance.
"The UK government said it would introduce stricter social distancing measures in parts of the country. PM Johnson announced that further easing of restrictions would be delayed due to the increasing number of cases," said Gittler. "The recent increase in cases does not seem to be much worse than elsewhere, but of course the trend is the problem. I welcome the UK government's swift move to prevent the situation from deteriorating unlike some countries. Perhaps it is the reason why GBP is up: market approval for early steps to avoid an even worse crisis later. "
The further easing of blocking restrictions in England – due to be introduced last weekend – has been postponed for at least two weeks after the number of cases of coronaviruses increased, while further localized blocking was imposed in outbreaks in northern cities.
Australia continues to fight a second waveThe authorities in Victoria announced stringent new restrictions on the fourth tier of the metropolis of Melbourne over the weekend, including an overnight curfew.
Image courtesy of health.gov.au
The restrictions were brought Community transmission – to get control over cases where the source of the transmission cannot be determined.
The country is battling a second wave of Covid-19 infections that are concentrated in the state of Victoria, which has aggravated the movement across the country as other states vigilantly monitor interstate movements.
The net result is a shuddering halt to Australia's economic recovery, which should resonate with that Reserve Bank of Australia (RBA) meeting on Tuesday morning.
The RBA meeting is the key domestic event for the Australian dollar of the week and expects the RBA to point to the increase in Covid 19 cases and the economic uncertainty that this developing situation presents for the outlook.
However, there is little reason to believe that the domestic Covid-19 situation will trigger a significant response from the RBA, and for this reason we would expect the Australian dollar to remain relatively immune to domestic developments.
"The RBA stood at its last meeting on June 2nd, and I see no reason why it should make changes at that meeting," said Gittler. "The Yield Curve Control (YCC) program is working well. Since the directive was introduced on March 19, the yields on three-year Australian government bonds have been well within their target of around 0.25%."
The graph above, courtesy of BDSwiss, shows that the current policy of the RBA to keep government bond yields at a stable level is on schedule and therefore expectations for an important policy announcement are low.
Regardless, it should be noted that the Australian dollar break-neck rally certainly ended between April and June, and we wonder what role the domestic picture plays in this.
As such, we would be concerned about a further deterioration in the local pandemic and negative surprises from the RBA that would contribute to the currency's recent underperformance against the pound.
When moving closer to GBP / AUD, however, it must be borne in mind that Sterling also has a central bank decision in the form of Thursday Bank of England Policy meeting where interest rates are expected to remain unchanged, but markets are looking for signals from Threadneedle Street to see if quantitative easing is expanded again.
The key question will be whether the emerging economic outperformance has made itself felt to the Monetary Policy Committee to the extent that they have a more optimistic tone about the outlook.
If so, we would expect the sterling to find some support from Thursday's event, as a stronger economy may mean future quantitative easing based on the FX rule of thumb that suggests quantitative easing increases = a weaker currency.
"Expectations are for unchanged interest rates and QE, although potential openness to further monetary stimulus is likely to weaken the pound soon, especially when the negative interest rate option is mentioned. Expanding QE would have less impact," said Asmara Jamaleh, economist at Intesa Sanpaolo.
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