GBP/AUD: Westpac: Momentum Still With Sterling

Westpac note that “sterling is the strongest G10 currency over the past 3 months and so far in 2021, albeit only just. As such, the Aussie down trend against the pound is to a substantial degree a reflection of sterling’s appeal.”

• “The Bank of England had been cautious about raising rates before there was a clearer picture on the labour market of the impact of the end of the government job furlough scheme in September 2021. As it turned out, the UK job market has held up fairly well, with a 4.1% unemployment rate and average earnings are growing faster than pre-pandemic.”
• “Of course, UK inflation has accelerated much faster than the BoE forecast, reaching 5.4%yr in December and on track for >7% Y/Y by April. The BoE began to raise rates from 0.1% in December 2021 and this month’s 25bp hike to 0.5% was a 5-4 vote, with the dissenters preferring 50bp.”
• “The RBA in contrast is keeping its 0.1% cash rate for now, likely until August on our view. This should act as a brake on A$, though 2-Year spreads have narrowed sharply as markets question the RBA’s stance.”
• “The next few weeks into the March FOMC meeting should be unsettling for risk appetite and thus for A$. We see AUD/GBP spending considerable time with a GBP0.51 handle (GBP/AUD spending considerable time above AUD1.93).”
• “But our baseline forecast for end-2022 is AUD/GBP GBP0.53 or GBP/AUD AUD1.88-1.89, with Australian wages and inflation likely to be justifying RBA tightening into 2023.”