GBP/AUD Quarterly Report

Technical analysis suggests there are support levels for pound Sterling to the Australian dollar  (GBP/AUD) exchange rates at 1.7240. If this is breached the next levels look to be 1.685, based on the lows after the Brexit vote it could possibly be as low as 1.645. The British pound (GBP) has tried to stage a rally back through AUD 1.75 but there’s just no appetite for GBP at the moment.

Reasons for continued GBP weakness

Brexit Trade Deal – The Brexit deal was agreed but not heralded as a particularly good deal for the UK. With no financial services deal in the Brexit Trade Agreement triggered an outflow of funds from the City of London across to Frankfurt/Paris/Berlin etc. This will directly reduce UK GDP and importantly affect tax income for the Treasury, adding further pressures to the UK as the Brexit trade deal details are worked through over the next coming months.

COVID -19 – With the UK being crippled by the Coronavirus and still not under control by any means. With the new virulent UK strain, daily increase in cases and the NHS struggling to cope, investors are moving funds away from GBP to other safer territories. Although a COVID-19 vaccine programme is underway, England is back in lockdown with no end date revealed.

Reasons for continued AUD strength

COVID-19 – The number of cases across Australian remains under control, consequently, the economy is holding up and businesses are optimistic about 2021.

EU – China Trade Deal – The recent EU-China investment deal means unlike the UK, Australia will see an increase in exports and demand generally. Equally the Chinese Communist Party have been flaunting their own success at keeping Covid “under control” as witnessed by the stark contrast in New Year celebration scenes in Wuhan compared with London, New York and other major cities across the globe. A strong Chinese economy means a strong AUD

Other factors

US election – with Biden close to moving into the White House and the Democrats seizing control of the Senate, democratic policies can now be pushed through. Increased spending, healthcare, debt for the US, which will see the USD continue to lose value.

The possible resumption of closer trade talks between the US and China after the breakdown in talks between the two superpowers last year. This would benefit the Australian Dollar relative to the pound.

In Summary

I think GBP will continue to struggle to make headway in the first quarter of 2021 UNLESS the UK government can get COVID-19 under control.

The above chart is GBP/AUD weekly chart, each vertical line (known as a candlestick) represents a single week of GBP/AUD prices, the green ones represent the pound close higher against AUD than it opened. The red candlestick conversely is a bearish week where the pound closes lower against AUD than it started the week. After prices broke the uptrend that had been in place since 2016 we are now making lower lows and the momentum favours more downside. Only a strong 3 week close above 1.78 would indicate a potential reversal in direction….