AUDGBP Higher but the Pair Still Tests 2021 Lows

AUD GBP Lower Again with UK Inflation Surge

The AUDGBP exchange rate was 0.11% higher on Monday but a two-week surge has seen the pound take the upper hand against the Aussie dollar. The Australian currency is suffering from a pullback in iron ore prices, while there was a recent resurgence in trade arguments with its largest customer, China.

The AUD to GBP rate trades at 0.5465 after seeing a new low for the year last week.

Iron ore bubble may have peaked

Iron ore futures are now down by more than 20% from the peak in the year and this is hitting the Aussie dollar hard.

RBC bank said of the economic outlook in China:

“Statements from policymakers have consistently emphasised the need to shift towards “prudent” policy, which means less stimulus, and a reversion to the pre-pandemic deleveraging policy. The turn back towards deleveraging has already reduced China’s sequential quarter-on-quarter growth momentum. Historically, sustained deleveraging cycles have unleashed disinflationary pressures in China, as in 2013-2015 and 2018when headline CPI fell under 2% y/y at the end of both cycles. Current Chinese headline and core CPI inflation are running under 1%, so we may expect continued muted domestic inflation now that a new deleveraging cycle is underway.”

The latest drop in ore prices coincides with inflationary fears and a belief that the RBA could be behind the curve in rate rises. US investment bank Morgan Stanley said:

“2Q21 will be the ‘last hurrah’ for AUD/USD strength…we think AUD/USD will begin to diverge from risk assets as the primary driver of the AUD shifts from global risk demand and global growth to policy divergence.”

Australia’s central bank is expected to move more slowly to tighten monetary policy compared to other major central banks. Wage growth and inflation continue to print below the bank’s targets the RBA has said it will not raise interest rates until actual inflation was within its 2%-3% band

Virus variant could weigh on the UK

The UK was seeing a bearish headwind from the Indian variant spread, which is said to be at 3,400 cases in the country.

Despite this, a recent study by Public Health England has shown that the Pfizer vaccine is up to 88% effective against the latest strain. PHE’s Covid-19 strategic response director, Professor Susan Hopkins, said the data trend was “quite clear” and heading in the “right direction” for a full reopening of the UK economy.

The pound has been boosted by a further reopening of its important services sector in recent weeks and that keeps the country on course for one of the best growth rates this year amongst G7 nations at 7.2%, according to the Bank of England. The latest drop in the price of iron ore adds a gap to the UK versus Australian numbers.

The AUDGBP pair may look to test the 0.8400 level if the current bounce is weak. That would open up a potential drop to the lower levels with 2020 seeing lows beneath the 0.5000 price level.