Pound to Australian Dollar: Recovery Grows in Confidence

Image © Adobe Stock

The Pound to Australian Dollar exchange rate’s recovery is growing in confidence following the recent break above the 100-day moving average (DMA).

GBP/AUD broke above the 100 DMA last week following the release of stronger-than-expected U.S. labour market figures that lowered the odds of an interest rate cut at the Federal Reserve in 2024.

The adverse stock market reaction was a classic negative development for the Aussie Dollar, which is positively correlated with global risk sentiment. When stocks sell off, so too does Australia’s Dollar, which in turn lent GBP/AUD a hand higher.

GBP was actually a beneficiary of the U.S. jobs data, rising against all G10 peers apart from the USD. This is because markets have simultaneously lowered expectations for rate cuts at the Bank of England.

The decline in expectations for a Bank of England rate cut brings rate cut expectations between Australia and the UK closer together (the RBA is still expected to be the last central bank to cut rates); thereby blunting a key driver of AUD outperformance.

GBP/AUD’s break above the 100 DMA (located at 1.9251) is significant as it had been a source of frustration for those wanting a stronger Pound, as shown in the daily chart below:

Above: GBP/AUD at daily intervals, showing the location of the 50 DMA. Track GBP/AUD with your own custom rate alerts. Set Up Here

Our reading from the above is that the 100 DMA could turn into a source of support that underpins an uptrend that is growing in confidence.

The key determinant of whether this expectation proves correct or not will be the midweek release of U.S. inflation data. We started off this article detailing how GBP/AUD rose following last week’s U.S. jobs report. The inflation print is arguably a more important reading, meaning the market reaction could be larger.

Should the data beat expectations, look for GBP/AUD to push higher. An undershoot will put the exchange rate back under pressure, with the scale of the selloff depending on the scale of the deviation from consensus expectations.

The figure to watch is 0.1% month-on-month for headline CPI and 0.3% m/m for core. A beat on this figure could prompt a breakdown in Pound-Dollar below the aforementioned 1.2675 support.

Keep an eye on Australian labour market figures, due Thursday, which will be the domestic highlight. Here, employment is anticipated to have grown 27.5K in May, while the unemployment rate is expected to fall from 4.1% to 4.0%.

A strong print can give the Aussie a tailwind.