- British economy favors further strengthening of GBP as Australia pays the price of low vaccinations.
- China’s new Covid-19 situation and souring relationship with the US could spill over to Australia.
Australia’s delicate Covid-19 situation proved punitive to AUD last week, with the Aussie on the losing side for most of the week. The trend continued in early Monday trading, setting the stage for further potential losses for AUD. GBP is currently riding the Australian Covid-19 wave, and the GBPAUD pair was 0.38% lower than 24 hours earlier but still at a 14-month high at the time of writing.
Vaccinations may have made all the difference, but China is still influential
The big difference between Australia’s and Britain’s vaccination numbers has proven decisive in their economic recovery. Australia has so far fully vaccinated about 24% of its population, a figure that pales in comparison to the United Kingdom’s over 70%. This has helped the UK reopen the economy, while Australia has had to shut down significant segments with new travel restrictions and lockdowns.
In addition, the UK has also begun relaxing travel restrictions against European visitors, giving the economy a further boost in its international trade. The macroeconomic situation is also encouraging, with the UK housing market looking strong. Despite a decline in the housing index from 0.7% in June to -0.5% in July, there was a 10.5% rise in house prices last month.
The rising tension between the United States and China may make things harder for AUD to recover. Australia’s reliance on China as her largest export market means that an adverse effect of the Sino-American relations to China’s economy will ultimately be felt by Australia.
Beyond the US-China tension, the risk-sensitive AUD could also take further hits if China’s new Covid-19 cases continue to surge. China has already shown its willingness to impose lockdowns, as just a few weeks ago, hundreds of thousands of people in Nanjing were put under lockdown. The Delta variant has so far been detected in 15 provinces in China, and there are fears that it could spread further.
British economy to influence BoE policy and Covid-19 trajectory could influence RBA decision?
The Reserve Bank of Australia is expected to meet tomorrow to agree on a monetary policy for the country. If the RBA retains the current policy, then AUD is likely to lose more ground, following last week’s inflation data that showed a 3.8% spike in consumer prices.
Analysts can take a hint from RBA’s reference to current inflation as “transitory”, meaning that there’s a big chance that the monetary policy will remain unchanged.
The Bank of England will meet two days after the RBA’s meeting, and the GBPAUD pair may rise to 1.9000s territory if the bank announces a less dovish monetary policy.
The sustained decline in Covid-19 cases in the United Kingdom has created renewed optimism about the British economy, which is likely to strengthen GBP. According to the latest survey, about 40% of businesses in the United Kingdom expect to raise the prices of their goods and services as the economy recovers. This is likely to trigger inflation in the coming weeks.
The pair seems to be overbought as its Relative Strength Index (RSI) is currently at 69. This also means that the market momentum is strong, and the bulls may push the price to resistance at 1.9050.
Conversely, if the market becomes bearish, GBPAUD may head down to the first support at 1.8838 and the second support at 1.8614.