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Technicals and optimism over China-U.S. trade conspire to press GBP/AUD lower.
The Pound to Australian Dollar exchange rate (GBP/AUD) is oscillating within the confines of a well-defined consolidation zone, with the current pulse being lower.
As the chart shows, we have resistance up at 2.1035 and support down at 2.0485. 2.0789, where we are now, is acting as a pivot. The simple story is that a rally to resistance was recently rejected, and a journey south is underway:
Above: GBP/AUD at daily intervals.
Whether it meets the aforementioned support will depend on whether the pivot gives way, or if it offers up some support, as it did through April. Looking at the chart shows that when the pivot support gave way, we were down to 2.0485.
There is nothing too exciting to be divined from the charts, meaning those with GBP/AUD payments have a relatively stable near-term outlook to base their decisions.
There is a decent fundamental narrative driving the pullback in GBP/AUD that speaks of 'high risk' / 'high beta' currencies like the Aussie outperforming: trade tensions are waning again.
China and the U.S. send their trade negotiators to London this week to hash out a resolution on various sticking points required to unlock the trade accord recently agreed in Geneva.
"While Xi Jinping’s administration has shown determination not to bow down to Trump’s tariff intimidation, having already been forging deeper trading relationships with other nations, there are hopes that both sides will want to agree on a deal," says Susannah Streeter, head of money and markets at Hargreaves Lansdown.
The U.S. is seeking to restore flows of critical minerals, and China is seeking tariff reductions and an easing of export controls.
Progress here will settle nerves about the trade war and ultimately point to an overall tariff burden that is lower than a counterfactual where China and the U.S. fail to reach a resolution on outstanding issues.
This would be good for the Chinese economy and its proxies, including the Australian Dollar.
Broader investor sentiment received a boost late last week after U.S. employment numbers beat expectations, lowering anxieties about the outlook for the U.S. economy and financial markets.
"Friday's job numbers allayed fears from earlier in the week about the state of the US jobs market. Number of job additions came in at 139,000 vs 126,000 expected and average hourly earnings also came in higher. Treasury yields climbed, resulting in dollar strength and US equities finished higher due to the improved sentiment of the US economy," says Thanim Islam, Head of FX Analysis at Equals Money.
The Aussie Dollar has a 'high beta' to the U.S. markets, meaning it tends to do better when sentiment is good and stocks are on the up. As long as this can continue, then the Aussie can pressure GBP/AUD lower.
With this in mind, watch Wednesday's U.S. inflation print, where a reading of 2.5% y/y is expected. Anything above here would lower the odds of a Federal Reserve rate cut in the coming months, and weigh on sentiment and the Aussie Dollar.