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Neither the UK nor Australia are in Trump's firing line, but the 'tariff trade' augments GBP/AUD upside.
The Pound to Australian Dollar (GBPAUD) exchange rate has been in a recovery sequence since January 24, and the move will be bolstered by recent tariff developments that include a 10% tariff on Chinese goods imported into the U.S.
China says it will retaliate, meaning Australia's main trading partner is entering a tariff war.
The U.S. Dollar is the standout winner under such circumstances, and China and its proxies must devalue.
The most prominent China proxy in G10 is the Aussie Dollar, leaving little surprise that it fell in response to confirmation of President Donald Trump's initial tariff salvo.
So, although Australia is not a focus of Trump's initial efforts to reshape global trade and geopolitics, the impact on global trade and growth from tariffs will impair AUD.
This spells a strengthening of GBPAUD, and we forecast a continuation of recent trends to the 2024 highs just north of 2.0200.
However, for a fresh breakout, we would need to see the tariff heat turned up even further, and here, only Donald Trump has the answers.
Downside risks to GBPAUD include any softening of the tariffs Trump imposed on Canada and Mexico over the weekend. We note that there are talks scheduled for late Monday. A surprising breakthrough would bolster market sentiment, thereby boosting the risk-sensitive AUD.
For now, the British Pound is trading like a 'tariff trade' safe haven. The Dollar is tearing higher, but the UK currency is outperforming the majority of G10 names, shadowing the safe-haven Yen and Swiss Franc.
Outperformance speaks of relative confidence that the UK isn't as economically exposed to tariffs as the major exporters, such as the EU.
Speaking late on Sunday, Trump said trade with the UK is "out of line," but the issue "can be worked out".
It is clear his focus will instead be on the EU, which he says has been treating the U.S. "very badly" on trade.
"It is perhaps not the size of the trade levies that has caught markets wrong-footed, but both the hastiness at which they will be imposed and the speed of the retaliatory response from authorities in Canada and Mexico. We have on our hands a full-blown trade war and one that, worryingly, may have only just begun, with President Trump hinting that the EU will be next to feel the wrath of his tariff policies," says Matthew Ryan, Head of Market Strategy at Ebury.
GBPAUD Week Ahead to be Dominated by Bank of England Decision
Tariff developments will be the preeminent driver of global FX, and certainly AUD, but GBP also has the Bank of England decision to look forward to.
A 25 basis point cut to Bank Rate is to be delivered, with the Monetary Policy Committee likely indicating it will maintain a cautious yet determined stance on delivering further cuts.
The message the Bank will want to put across is that it wants to maintain its quarterly pace of interest rate cuts, which implies a total of four for 2024. Current market thinking is that it will only be able to carry out three.
So, there is some potential for adjustment in fixed-income and foreign exchange markets towards accepting more cuts.
The textbook says this will weigh on the Pound, but the UK currency has already taken a sizeable hit in 2025 and the downside is looking far better protected than was the case at the start of the year when it looked richly valued.
For GBPAUD, the Bank could prompt some volatility, but ultimately, it is the bigger global picture that will remain in charge. And here, all signs point to further weakness in the coming days and weeks.