Despite the Pound rebounding from lows against many major currencies today, the British Pound to Australian Dollar (GBP/AUD) exchange rate is sliding. Investors are buying the Australian Dollar back from its worst levels after a period of broad weakness, thanks to the slightly calmer market outlook as well as reaction to the Reserve Bank of Australia’s (RBA) latest policy stimulus measures. However, this AUD rebound may not last.
After opening this week at the level of 1.9846, GBP/AUD spent much of the week climbing. This is despite the Pound’s weakness and was largely due to even broader AUD losses. GBP/AUD even touched on a high of 2.07 yesterday – the pair’s best level since the 2016 Brexit vote and almost ten cents above the week’s opening levels.
Since then though, GBP/AUD has slumped back down again. In fact, GBP/AUD has lost almost all of this week’s gains and is trending in the region of 1.9900 at the time of writing on Friday.
GBP Exchange Rates Find Resilience as Bank of England (BoE) Measures Impress
The Pound had been broadly unappealing in recent weeks as concerns over the UK impact of the coronavirus pandemic worsened. This was limiting the Pound’s potential for gains against an even weaker Australian Dollar.
However, the Pound’s appeal was bolstered yesterday as the Bank of England (BoE) suddenly ramped up its policy stimulus measures.
In an emergency announcement, the bank cut UK interest rates to 0.1% – the lowest rate on record. The bank also ramped up its quantitative easing (QE) scheme.
The quantitative easing was especially impressive to markets, and helped the Pound to find some support and calm after days of sharp losses. According to Kenneth Broux, Currency Strategist at Societe Generale:
‘It’s been extraordinary. The Pound is acting more like an emergency markets currency.
Tuesday was panic stations and we had a big blow out in gilts. Investors have been liquidating all types of investments just to drum up cash (in Dollars).
A lot of investors were terrified by the chance of Sterling falling even lower and deeper losses.
The Bank of England’s action was very timely. It’s not about the rate cut, more about restarting quantitative easing.’
However, while this and hopes of more UK fiscal stimulus is helping to bolster Sterling support, it has still been sliding against a recovering ‘Aussie’.
AUD Exchange Rate Recovery Bolstered by RBA’s Stimulus Action
The Australian Dollar has suffered significant losses in recent weeks. As a currency correlated to market risk and trade-sentiment, it has been among the currencies to suffer most from the coronavirus pandemic so far.
Investors had sold AUD en masse, scrambling after safer currencies. Concerns that Australia’s economy could suffer a considerable recession thanks in part to the outbreak only further dampened AUD.
However, the ramp up in global stimulus policy from global central banks and governments in recent sessions has helped market sentiment to cool slightly.
This, as well as the impressive stimulus action from the Reserve Bank of Australia (RBA) yesterday, has helped AUD to recover from its worst levels.
The RBA cut Australian interest rates and announced other quantitative easing (QE) measures. According to Sean Callow, Senior Currency Strategist at Westpac:
‘I think the Aussie found its feet a little bit after the RBA announcement because the cash rate cut and yield target cut were in line with expectations,
We also welcomed the term funding facility.
There’s a glimmer of confidence [from the RBA’s stimulus], enough for people to shore up some short positions in the Aussie,
Those positions have been very large and extremely profitable as of the middle of yesterday.’
GBP/AUD Exchange Rate Forecast: Rebounds May not Last
Both the Pound and Australian Dollar briefly saw a rise in demand in recent sessions, but unless the coronavirus outlook continues to calm somehow these movements may not last.
Pound investors will continue to look towards potential fiscal stimulus measures expected to be announced and discussed by the UK government soon. If the stimulus fails to impress, the Pound’s recovery potential will be dampened.
However, if they do impress the Pound has a decent chance to sustain gains against the Australian Dollar.
While AUD has rebounded slightly from its worst levels, it remains correlated to risk and trade-sentiment and is highly unappealing amid the coronavirus pandemic.
As a result, the Australian Dollar is likely to remain under pressure, so the Pound to Australian Dollar exchange rate’s potential for losses may be limited for now.
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