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The risk rally drives the Australian Dollar to the cusp of a breakout against the Pound.
The Pound to Australian Dollar exchange rate (GBP/AUD) sits on the cusp of a key support level that, if broken, opens the door to an extension to levels last seen in April.
The Aussie Dollar extends gains on the distinct improvement in the global trade outlook now that Japan has struck a new trade accord with the U.S. and the EU looks set to follow.
Reports suggest the EU and U.S. will ultimately settle on a 15% U.S. import tariff, which is better than the 30% Trump warned would be the case in the event of no new deal being reachd.
The Aussie's gains speak of its high gearing to investor sentiment that means it tends to outperform when the mood music is good. And that mood music surely is good, with indices in Singapore, London and New York all printing new record highs.
"The AUD and NZD are leading gains among the G10 currencies on the back of the pro-risk mood," says Shaun Osborne, Chief FX Strategist at Scotiabank.
This means GBP/AUD is now testing below a graphical support line located at 2.0485, which we predicted would occur in Monday's Week Ahead. As the annotations in that report show, we looked for a short-lived GBP/AUD rise before a test and break of the trendline.
That forecast was correct, although we had not expected the move lower to come so soon.
Should support at 2.0485 be confirmed, by a daily close below, ideally two daily closes below, then a move to 2.0328, the April lows, is invited.
The momentum appears to be with the Australian Dollar, which is particularly sensitive to investor sentiment shifts that have their roots in Asia, owing to the region's geographical proximity to Australia and tight trading linkages.
In addition to Japan, trade deals have been settled with a number of important Asian countries, such as Vietnam and Indonesia, with South Korea the final major regional nation yet to settle with the U.S.
"After China, where another round of talks is in the pipeline, Japan’s deal marks an important event as the 15% tariff level is lower than expected and includes the autos sector, potentially offering 40bps of extra GDP growth. This may serve as a template for Korea, whose US export and geostrategic template is similar to that of Japan. ASEAN is more split. On one side are economies with," says Philip Wyatt, Macro Strategist at UBS AG in Hong Kong.
UBS thinks Asia economic growth would still suffer from a mild export contraction in 2H, but should avoid a protracted GDP slowdown sub-4%.
Worst-case outcomes have therefore been avoided, which is supportive of the region, and relief is evident in AUD's ascent.
However, the biggest channel through which this AUD-supportive impulse flows is via the lifting of uncertainty, as it is uncertainty that markets particularly hate.
It looks as though the runway is cleared to further AUD gains.