Pound-Australian Dollar Recovers from Two-year Lows, Corrects from Oversold
by Gary Howes- GBP/AUD hits two-year lows in Sept.
- But GBP/AUD oversold on technical basis
- GBP/AUD to remain under pressure amidst ongoing Brexit tensions
- Risks to downside view is breakthrough in negotiations
- GBP/AUD spot rate at time of publication: 1.7692 (up 0.60%)
- Bank transfer rates (indicative guide): 1.7077-1.7201
- Transfer specialist rates (indicative guide): 1.7276-1.7537
- More information on specialist rates here
The British Pound advanced against the Australian Dollar on Monday as market await fresh news on Brexit trade negotiations and Sterling recovered from oversold conditions.
The Pound-to-Australian Dollar exchange rate (GBP/AUD) was quoted half a percent higher at 1.7662 at the start of a new week, having fallen to two-year lows on Friday.
GBP/AUD fell 3.65% last week amidst solid downside momentum and various indicators continue advocate for further GBP/AUD downside, however the pair had become oversold with the Relative Strength Index (RSI) on the daily charts falling to 24.73 at one point on Friday:
A RSI reading below 30 signals that an asset class has become technically oversold (lower pane in above chart), and consolidation or a recovery is therefore imminent.
That the RSI has corrected back to 30 on Monday aligns with the view that a sell-off becomes increasingly unsustainable when the RSI falls below 30. However, the RSI does not necessarily mean the trend will reverse, instead it could mean there is some pullback and consolidation before the prior trend resumes.
The Pound has endured a torrid September, falling sharply against all its major peers leaving it the worst performing major currency of 2020. The declines come as a deadlock in Brexit negotiations between the EU and UK triggers political uncertainty and a souring of relations between Brussels and London.
However having fallen significantly over recent days the bar to further deep declines starts to grow as the market adjustment reaches its limits with ever more negative news on Brexit required to keep driving the move lower; the possibility that the Sterling sell-off stalls therefore increases.
"Outsized moves in GBP this week have injected a sizeable risk premium in GBP. It's now trading at a decent discount on our short-term valuation, underscoring that some of the recent Brexit news has already been priced in. At the very least, this backdrop suggests that in the coming weeks GBP would benefit more from good news rather than sink further on bad news. We still expect more volatility but risk/reward favours taking profit at these levels," says Mark McCormick, Global Head of FX Strategy at TD Securities.
The previous week saw the UK pass the Internal Market Bill which is designed to secure the functioning of the UK's internal market from the start of 2021 when the country exits the Brexit transition period. In doing so, the Bill seeks to overturn some elements of the Withdrawal Agreement reached between the EU and UK in December 2019, leading to interpretations that the UK is effectively willingly breaking international law.
The UK says the move is necessary to ensure the future sanctity of the country amidst claims that the EU could use the Withdrawal Agreement to effectively ban the import of goods from the rest of the UK into Northern Ireland.
The claims made by the UK stem from the observation that the EU has not guaranteed that Great Britain would be added to their approved third-country food import listings despite the EU and UK currently operating on perfect alignment. By not including Great Britain on the list the EU would effectively break up the UK's internal market.
"It has been made clear to us in the current talks that there is no guarantee of listing us. I am afraid it has also been said to us explicitly in these talks that if we are not listed we will not be able to move food to Northern Ireland," said UK Chief Negotiator David Frost in a terse Twitter exchange with his EU opposite Michel Barnier on Sunday.
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"GBP has predictably fallen in the aftermath of these developments," says Shahab Jalinoos, FX Strategist at Credit Suisse, who last week told clients his team was lowering some of their Sterling forecasts.
As long as tensions remain elevated, and until there is some signs of progress, expect the Pound to retain a heavy tone against its Australian counterpart which, by contrast, is one of 2020's better performers.
The risk to the view that GBP/AUD is poised for further declines is a sudden improvement in sentiment towards negotiations, or some developments that suggests markets are too pessimistic.
Indeed, the view that the two sides are posturing to gain leverage remains a popular one amongst analysts that should ensure some downside protection to yet further deep losses.
"The risk to this view adjustment is that it quickly becomes obvious that the latest UK government moves discussed above are a negotiating tactic only," adds Jalinoos.
Should a deal be struck we would expect the GBP/AUD exchange rate to rapidly recover recent losses.
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