The British pound has been in decline against the Australian dollar since August 2015 and our forecasts warn that the exchange rate is on course for a potential move below 2.0.
The GBP to AUD conversion is in what is becoming an established trend lower.
The long-term period of appreciation in the pound to Australian dollar exchange rate came to an end in August 2015, since then the market has carved out what is one of the more dependable technical structures in global FX.
What I am talking about here is a downward sloping channel that has dictated movement in the GBP/AUD exchange rate.
The structure of the channel is best explained through the following graphic:
The most recent rally in sterling was a function of two elements - the early-2016 commodity and stock market sell off + the technical rebound off the floor of the channel at 2.02.
I will concede that 2.02 is not the mark at which I have drawn the bottom line of then descending channel - but 2.02 is a psychologically significant number and it makes sense that the market had placed a number of buy orders on GBPAUD around these levels.
The question is where next?
It seems that the markets are yo-yoing between risk-on and risk-off mood once more and this is will make the picture murkier from a fundamental perspective.
Ultimately though, we believe it is too soon to call an end to the Chinese-inspired market jitters.
However, if markets do calm down and the Aussie catches a bid once more I would target a move lower towards 2.0 as the exchange rate moves towards the support line that forms the bottom of the channel.
2.0 is a significant psychological area that I believe many major market players will be setting buy orders.
In fact so significant is this level that it could well be the point where the channel lower is truly tested and sterling forms a solid bottoming pattern.
Commonwealth Bank Australia: AUDUSD Lower in 2016
We have meanwhile just received the latest predictions from Commonwealth Bank Australia.
"While the Australian economy has improved more than expected and given some support to AUD, global factors continue to
dominate and generate a net medium-term depreciation in AUD/USD," says a forecast note from the bank.
Those global factors are sub-trend Asian and world GDP growth, a firmer USD, and lower commodity prices putting downward pressure on Australia’s terms of trade.
Commonwealth are forecasting the AUDUSD exchange rate to reach a low of 0.65 towards the end of the third quarter 2016 before recovering.