Foreign exchange analysts at Barclays have updated clients with their latest foreign exchange forecasts. It says that British Pound is likely to remain strong while the Australian Dollar is prone to consolidation over coming weeks and months.
The UK-based international lender and investment bank sees upside potential in the Pound-to-Australian Dollar exchange rate (GBP/AUD) as a result.
Barclays Latest Forecast
“We expect sterling to remain strong, marginally outperforming USD and appreciating against EUR over the forecast horizon,” says Barclays’ analyst Marek Raczko.
Barclays economists expect the UK to experience a robust economic recovery, spurred by the rapid vaccination effort and fueled by generous fiscal stimulus.
“We also think the BoE will remain on hold throughout 2021, maintaining its accommodative stance, but the BoE is not likely to be concerned by a strengthening GBP, in our view, as it will likely reflect solid economic growth,” Raczko adds.
The call comes as the GBP/AUD exchange rate extends its 2021 recovery, rising from a multi-month low at 1.7416 on January 07 to a high just above 1.81 in mid-March.
However, the exchange rate has consolidated gains over recent weeks and is quoted at 1.8018 at the time of writing.
The Australian Dollar was one of the best-performing currencies of 2020, spurred on by a rapidly recovering Chinese economy that stoked demand for Australia’s bountiful raw materials.
A strong export book meant that by January, the country reported record current account and trade surpluses that offer fundamental support to the Aussie Dollar.
But, commodity prices have eased late while iron ore exports from Brazil—Australia’s main competitor in this space—have recovered significantly. This suggests the earnings from Australia’s main foreign exchange earner are likely to ease from recent highs.
China’s economic rebound has also eased, and expectations for a “commodity supercycle,” such as that witnessed in the early 2010s, is unlikely to repeat. Therefore, this denies the Australian Dollar the record valuations seen in that era.
“We expect the AUD to weaken in the short term as it consolidates after rallying sharply on growth outperformance and China tailwinds in 2020,” says Barclay’s analyst Ashish Agrawal.
“Tailwinds from China are likely to weaken as China’s moderating infrastructure investment could weigh on Australia’s commodity exports,” he adds.
Barclays economists expect Australia’s current account surplus to moderate to 1.9% of GDP in 2021 (2020: 2.5%) as goods imports rise with domestic demand.
Agrawal says the Aussie Dollar’s sensitivity to growth optimism and risk appears to have weakened, especially as stimulus prospects boosted U.S. optimism and rates climbed sharply, supporting the U.S. Dollar.
Meanwhile, the difference between interest rates on offer in the U.S., U.K., and Australia could weigh on the Australian Dollar as the Reserve Bank of Australia (RBA) guides to an unchanged cash rate until 2024.
High-interest rates at the RBA have long been a source of support for the currency as international investors hunted higher returns on their capital. But with a base rate now at 0.1%—in line with the Bank of England—that yawning interest rate advantage once held by Australia no longer exists.