The British Pound is attempting to push higher against the Australian Dollar once again at the start of a new week and ahead of quarter- and month-end, as the UK currency finds itself in the driver’s seat. Still, the Aussie Dollar looks decidedly more mixed and uncertain.
Increase in Pound Sterling on the Market
A rise in Sterling against the majority of the world’s largest currencies at the start of the new week suggests some idiosyncratic demand for the Pound, which is in turn feeding into a stronger Pound-to-Australian Dollar exchange rate (GBP/AUD).
GBP/AUD has lifted a quarter of a percent to trade at 1.8077, and those watching this pair will be eyeing a target at the month and 2021 best at 1.8147, a break of which would open the door to fresh 5-month highs.
“Sterling has benefited from the UK’s strong vaccination rollout relative to its peers this year, boosting recovery hopes and demand for UK assets,” says George Vessey, a foreign exchange strategist at Western Union Business Solutions.
For the Australian Dollar, commodity price trends and broader investor sentiment will be an important decider where the currency is headed over the coming days and weeks.
Providing some support to the currency has been an improvement in iron ore prices that have rebounded over the past week, thanks in part to easing concerns over further curbs on steel output in China.
While iron ore prices have recovered, concerns remain for Australia’s main export and foreign exchange earner.
“Further capacity reduction remains under consideration in China. Many regard the policy to reduce steel production, but we think it represents a critical policy shift from quantity to quality control. We still expect steel output to rise slightly in 2021. With demand for steel moderating, the risks of over-supply are rising,” says Brian Martin, an economist at ANZ Bank.
Over the longer-term, ANZ says China intends to consolidate the steel industry capacity and increase self-dependency for iron ore will pose downside risks to its imports.
Should iron prices fail to regain upside traction, the door to further, GBP/AUD gains are opened.
The course of GBP/AUD over coming days and weeks could, however, depended on how the larger and more decisive Australian Dollar-U.S. The dollar exchange rate (AUD/USD) evolves. The rule of thumb is any further declines in AUD/USD will on balance aid GBP/AUD upside.
Matthew Weller, Global Head of Market Research at FOREX.com, says “a huge head-and-shoulders” pattern is forming in AUD/USD, and it is now “something every FX trader is watching.”
“The US dollar has been on a tear over the last month, reversing its trend of relative weakness over the previous three quarters,” says Weller. “The recent moves have flipped the technical bias in favor of the greenback against most of her major rivals, but arguably the most compelling technical setup is in AUD/USD, which has carved out a huge head-and-shoulders pattern over the last three months.”
Weller explains this classic pattern shows a shift from an uptrend (higher highs and higher lows) to a downtrend (lower lows and lower highs) and often marks a significant top in the chart.
He says the pattern is typically confirmed by a break below the “neckline”; in this case, the neckline can be represented either by the ascending trend line near 0.7650 (already broken) or the horizontal support level at 0.7560 (still intact).