Sean Callow, analyst at Westpac, notes that GBP rose against all G10 currencies in Q4 2019, including a 3.6% gain against the Australian dollar and so far this year, sterling has continued to rise against the G10 but the Aussie has been able to almost keep pace with the pound’s rise.
“The near term outlook for sterling has weakened somewhat, as several Bank of England MPC members have sounded more gloomy on the UK economy despite the clarity on Brexit provided by the lopsided election win for PM Johnson’s Conservatives.”
“Pricing for a BoE bank rate cut (to 0.50%) by the 26 March meeting has jumped from 15% chance to about 65%. Westpac’s base case is a Q2 rate cut.”
“If the BoE does hold steady through Q1 and the Q4 optimism over avoiding a hard Brexit on 31 January returns, then GBP/USD should be able to recover to our 1.33 end-March target. But risks are clearly to the downside on cable.”
“AUD has found support from improved risk appetite, including equity market record highs and a pickup in key commodity prices. But even before Australia’s bushfire crisis we were expecting the RBA to cut the cash rate from 0.75% to 0.50% in February. The RBA’s 2.8% growth forecast for 2020 seems very optimistic (we are on 2.1%, consensus 2.3%).”
“Markets price only a 45% chance of the RBA cutting next month. If they deliver, AUD/GBP should target 0.51 (GBP/AUD towards 1.96) into March.”