Over recent weeks, the Pound has gained ground against the Australian Dollar, climbing into the upper half of an eight-year trading range. Analysts predict that the exchange rate could rise further in the coming weeks, potentially approaching 1.90, and may find support at around 1.8350, should the relative interest rate outlook remain favourable.
Although the Australian Dollar saw some gains against most major currencies midweek, it has underperformed among G10 and G20 currencies over the past month, contributing to a more than five percent rise in GBP/AUD for the year.
This recent uptick in GBP/AUD can be attributed to a supportive shift in bond yield differentials, with some reaching their highest levels since 2005 in recent months. Increases in the Bank of England's Bank Rate have also contributed to the rise in the GBP/AUD interest rate differential over the past year, with a relatively lesser increase in the Reserve Bank of Australia's cash rate playing a growing role as well.
The RBA's recent decision to leave its cash rate unchanged at 3.6% was a departure from its series of 10 increases that began in April 2022. Along with the Bank of Canada and Norges Bank of Norway, the RBA is one of only three in the G10 group to take a breather in efforts to bring down inflation.
Governor Lowe cited three reasons for the RBA's more cautious approach, including lower wage growth rates in Australia compared to elsewhere and a higher share of variable rate mortgages, which makes the RBA's cash rate a more significant influence on the Australian economy than in some other central banks and economies.
Despite these factors, the GBP/AUD interest rate differential could remain favourable in the near future, especially given the UK economy's recent outperformance of a pessimistic market consensus. This, along with the supportive bond yield differentials, may lead Sterling to new highs in the coming weeks or months.
Looking ahead, analysts predict that GBP/AUD will likely trade within a rough range of 1.8350 to 1.8950.
