AUD/GBP: Westpac Look For Move Higher As Year Wears On

Westpac note that in late February “AUD/GBP began a two-month descent. The catalyst for the initial decline was a sharp revival in the UK services PMI, seeming to douse recession talk (including from the BoE). UK yields jumped, bolstering the pound, and the narrative around the UK economy has continued to improve from the deep pessimism of late 2022 to January 2023.”

• “The terminal BoE bank rate was priced around 4.40% before the February services PMI; it is now ~4.85%. The RBA’s rate pause in April rate contributed to the 2-Year spread plunging beyond -75bp. But the RBA’s hawkish turn in May has reduced the Aussie’s yield discount, which should remain the case in coming weeks.”
• “Moreover, with the UK running a large current account deficit, GBP is reliant on yield appeal whereas Australia’s C/A surpluses provide the A$ with a degree of insulation from swings in global sentiment.”
• “UK inflation has not retreated as far as hoped lately, so the BoE could raise rates even further than priced. But this is also a risk in Australia. “
• “Australia’s leverage to China’s growth prospects has undermined the A$ in recent weeks, but we expect the outlook to improve as the year progresses. And once U.S. rates have decisively peaked, a weaker US$ should see the higher beta A$ rise on crosses, leaving open scope for a return to AUD/GBP GBP0.55 (GBP/AUD AUD1.82) by mid-year and further A$ gains over Q3.”