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The Australian Dollar is an obvious winner from the U.S.-China trade war détente.
The Australian dollar advanced against the Pound, Euro and other major currencies on Monday and looks set to build on these gains in the coming week.
Our Week Ahead Forecast for the Pound-to-Australian Dollar exchange rate (GBP/AUD) identifies increasing downside momentum and a potential test of 2.0485, ahead of 2.0328.
Aussie Dollar's were bought after the U.S. and China announced they would slash tariffs to pre-'Liberation Day' levels following weekend talks between the two sides in Geneva.
For the next 90 days, the combined 145% U.S. tariff on most Chinese imports will be reduced to 30%, meaning the tariff rate tied to fentanyl remains, while the 125% Chinese duties on U.S. goods will drop to 10%.
"Huge win for China if confirmed. This takes the tariffs back close to pre-Liberation Day levels. Markets will ignore the 90-day Damoclesian window, as it is clear that neither side has the stomach for the economic pain," says Simon French, Chief Economist at Panmure Liberum.
A win for China is a win for financial assets closely aligned to China, including the Australian Dollar.
"From a Chinese perspective, the talks were also a success," says Antti Ilvonen, Senior Analyst for the U.S. at Danske Bank. "With tariff rates significantly lower, the Chinese growth outlook for the coming quarters looks a lot better."
An improved Chinese growth outlook would benefit Australia, which counts on China to buy its exports. The strong trade links is why AUD trades as a Chinese proxy.
The Pound is weaker vs. the Chinese yuan, the Aussie, and the Kiwi dollar, "as currencies that are linked to China also receive a boost from the trade talks," says Kathleen Brooks, research director at XTB.
Above: GBP/AUD at daily intervals.
The GBP/AUD exchange rate has now fallen below the 9-day exponential moving average (EMA), which our Week Ahead Forecast model takes as a signal that the direction of travel in the next few days is lower.
The Relative Strength Index has fallen below 50 and is pointing lower, suggesting momentum to the downside is picking up again.
The Week Ahead Forecast model looks to target 2.0485, which is last week's support zone, ahead of a move to 2.0328, which is the lower end of the March-April range and a decent source of support. The 100-day EMA is also located close to here, which should attract further tactical support.
The Australian Dollar has been relatively well supported since 'peak fear' around trade was reached in early April following the announcement of the April 02 'Liberation Day' tariffs.
What the U.S. reversal suggests is that further relief is possible in the coming days as we move further away from peak fear, which can only help the AUD appreciate further.
Looking a little further ahead, the pro-AUD trade will have its limits as markets find the bulk of good news that is possible, given Trump's overarching agendas, has come to pass.