September 23, 2020 - Written by Ben Hughes
STORY LINK GBP to AUD Exchange Rate Continues to Climb on Coronavirus Jitters
Market fears of a second global wave of coronavirus infections have been dominating the British Pound to Australian Dollar (GBP/AUD) exchange rate this week. While coronavirus lockdown fears have been rising in Britain, investors have been selling currencies correlated to market risk and trade sentiment like the Australian Dollar. On top of that, this week’s Reserve Bank of Australia (RBA) news has given the ‘Aussie’ a heavy knock.
Following last week’s modest GBP/AUD gains from the level of 1.7574 to 1.17717, GBP/AUD has continued to gradually advance this week so far.
Still, GBP/AUD remains well below the highs seen at the beginning of the month. At the time of writing, GBP/AUD trends in the region of 1.7865, barely regaining half of the losses seen since September began.
On top of this, GBP/AUD remains only around three cents above the lows of 1.7523 seen in recent weeks, which were the worst levels for the pair in over a year.
GBP Exchange Rates Gaining on Weaker Rivals but UK Concerns Persist
The Pound is gaining against the Australian Dollar this week, but this is largely due to the broad weakness of the Australian Dollar.
Sterling’s movement has been more mixed in comparison, but has generally been quite weak. Investors have been selling the Pound back from its recovery attempts, as the British currency is hit by fears of fresh coronavirus restrictions in Britain.
While the UK government has not announced a second lockdown, it did ramp up restrictions yesterday amid a surge in UK coronavirus cases.
According to Michael Hewson, Chief Market Analyst at CMC Markets:
‘The hope is that September will continue to see economic activity remain close to the levels seen in August, where “eat out to help out” helped boost the services numbers significantly,
Of course, after the events of yesterday, and the sudden tightening of restrictions, all of this is rather moot, as well as auguring badly for any type of continuity as we look towards Q4, not to mention what it does for consumer confidence.’
The Pound was also weighed by today’s UK PMI projections, which showed Britain’s key services sector was not performing as resiliently as hoped, even before new restrictions in consumer activity were announced.
According to Thomas Pugh from Capital Economics:
‘The drop in the composite IHS Markit/CIPS Flash PMI from 59.1 in August to 55.7 in September (consensus 56.3) suggests that the recovery has already started to flatten out. And reinstating restrictions on business opening hours and encouraging people to work from home again could cause the recovery to stall completely in Q4.’
AUD Exchange Rates Slump on Risk-Aversion and Reserve Bank of Australia (RBA) Rate Cut Bets
The Australian Dollar is a currency often correlated with risk and trade sentiment. As a result, it has been hit hard by the latest surge in global coronavirus infections.
As fears of a second wave of infections solidify, investors are selling currencies correlated with risk in order to seek out safe havens.
This has led to big Australian Dollar losses this week so far.
On top of this though, the Australian Dollar has also been hit by a surge in bets that the Reserve Bank of Australia (RBA)
will become more dovish.
The RBA has shown resilience in recent months, and has even received criticism for not being dovish enough on monetary policy.
Comments from RBA Deputy Governor Guy Debelle this week have led to fresh speculation that the RBA is about to cut interest rates and ramp up quantitative easing (QE) in order to defend Australia’s economy from the coronavirus pandemic.
Westpac Chief Economist Bill Evans said:
‘The theme is likely to be, as we saw in March, a Team Australia moment where the Reserve Bank is directly supporting a bold Federal Budget,
The prospect of the RBA sitting back to assess the Budget, which has been seen as the norm in previous years, is not appropriate for these unique times.’
GBP/AUD Exchange Rate Forecast: Coronavirus Developments Remain in Focus
Most of this week’s most notable UK and Australian data has been published already. Even then, most of the week’s GBP/AUD movement was caused by coronavirus developments so far.
As a result, coronavirus developments are expected to continue to dominate market sentiment.
If Britain’s coronavirus situation continues to worsen, or tighter restrictions are signalled, the Pound’s potential for gains will be further limited.
However, as global coronavirus fears intensify, the risk-correlated Australian Dollar could be in for even deeper losses as investors keep looking for safe havens.
On the other hand though, if there are signs that the global economy would weather the pandemic, investors may be more willing to take risks. This could knock the Pound to Australian Dollar exchange rate’s recovery attempts.
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TAGS: Pound Australian Dollar Forecasts