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GBP/AUD forecast for 2020

By Elena Berton

What's the GBP/AUD forecast for 2020 as the UK gets ready for trade talks with the EU and Australia reels from the devastation of the bush fires?

The GBP/AUD exchange rate in 2019 has seen a gradual strengthening of the British currency as Brexit uncertainty faded, particularly after the UK general election in December when the pound hit a year high of AUD1.9389.

The GBP to AUD long term forecast in 2020 will depend on the outcome of trade talks between the UK and the EU, as well as any rate cuts in the UK and Australia if the central banks feel the economy needs support.

Despite the relatively small size of the Australian economy (Australia is the world’s 13th largest economy by GDP, less than one-tenth the size of the US) the Australian dollar is the fifth most traded currency in the world, behind the pound.

The Australian dollar owes its popularity to the so-called “three Gs”: geology, geography and government policy.

The country has a wealth of natural resources that are in high demand. These include oil, gold, agricultural products, diamonds, iron ore, uranium, nickel and coal, particularly among its neighbouring Asian economies.

In addition, a stable government with a Western approach to business has led to fairly stable high interest rates.

GBP to AUD exchange rate forecast

The main drivers to gauge GBP/AUD predictionsin 2020 are economic data as well as daily news flow on natural disasters, elections and new government policies.

In the case of Australia, the focus will be on how fast its economy recovers from the worst wildfires seen in decades. These have left large parts of the country devastated since the fire season began in late July.

While Australia is a fairly wealthy country, it relies heavily on agricultural and mining commodities.

In addition, its trade and economic performance have become closely linked with China, which is impacting Australia's role in the region.

China, along with India, is a large importer of commodities produced in Australia and in turn Australia is reliant on Chinese-made machinery and consumer goods.

Any impact on the Chinese economy from trade disputes with the US or the coronavirus outbreak could weight on Australian dollar in the short term.

Wildfires impact

Another factor that could influence the performance of the antipodean currency is consumer confidence, which has taken a battering from bush fires.

While wildfires are common in Australia, the current season was unprecedented in its scale of destruction and duration.

There have been fires in every Australian state, with New South Wales being the hardest hit.

The latest Westpac-Melbourne Institute Index of Consumer Sentiment, released last week, fell 1.8 per cent in January to the lowest since last October, after declining 1.9 per cent in December.

The index was down a staggering 6.2 per cent from a year earlier, further weighed down by expectations on employment, spending on household items and long- and short-term economic conditions.

"It is entirely reasonable to have expected that the index would have fallen during this period of devastating bush fires, Westpac chief economist Bill Evans said.

"Perhaps it is somewhat surprising that the fall in the index was not more severe, particularly in light of the 5.8 per cent fall we saw during the Queensland floods in 2011".

Economists generally expect the bush fires will weigh on gross domestic product by 0.25 between 0.4 per cent in the first quarter of 2020, with agriculture, retail, tourism and construction the hardest hit.

The Australian Tourism Export Council has estimated international tourism revenue in 2020 could fall by 10 per cent to 20 per cent.

Looming RBA rate cut?

“Overall, we think that the bush fires increase the likelihood of a rate cut from the RBA in February,” UBS analysts wrote in a note to clients.

The Reserve Bank of Australia (RBA) cut interest rates three times last year to an all-time low of 0.75 per cent and has signalled intentions to do more if needed.

Any rate cuts would weaken the Australian dollar versus the pound.

Looking ahead, the British pound to Australian dollar exchange rate forecast could be influenced by the RBA’s first monetary policy decision in 2020, due on February 4.

The central bank will likely weigh the recent, better-than-expected labour market data and the upcoming release of the official Consumer Price Index for the fourth quarter of 2019 against the impact of the bush fires.

In its latest Australian business outlook, Deloitte has predicted two further rate cuts in 2020, but believes the central bank will not resort to quantitative easing despite suggestions it could buy government bonds as a last resort.

The bushfire crisis is the latest in a string of bad news for the economy, hitting consumer confidence along with the ongoing construction downturn and prolonged drought, Deloitte analysts said.

Warren Hogan, economic adviser at Australian consultancy TEC, instead, expects stable rates in the short term, even though the RBA has 50bp of rate cuts left before hitting the lower bound of 0.25 per cent.

However, he cautioned if Australia’s economy looks like taking a step down from already soft rates of growth, the RBA will cut, even though any further cuts “will do more harm than good”.

“Any loss of momentum in the economy is likely to result in a further small downward adjustment to interest rates to 0.25 per cent and spark talk of quantitative easing here in Australia,” Hogan said.

“The big risk is Quantitative Easing from the RBA. They have said they don’t want to do it but plenty of economist are expecting it.”

BoE in focus

Another key date for GBP/AUD exchange rate forecasts will be the Bank of England rate decision on January 30.

The GBP enjoyed a huge resurgence at the end of last year, following the clear-cut general election result in December.

UK Prime Minister Boris Johnson’s commanding majority saw his EU withdrawal bill pass swiftly through parliament and confirmed January 31 as the date for the country’s formal exit from the bloc, removing months of uncertainty.

The election results strengthened the pound, which ended 2019 at AUD1.8895, 6.19 per cent higher on the start of the year.

In the near term, the British economy and any eventual reaction by the central bank will be the main factor influencing the performance of the pound.

Bank of England rate-setters, including outgoing governor Mark Carney, have all expressed varying degrees of dovishness, hinting a further rate cut could be on the cards.

But fresh, upbeat economic data this month have cast doubt on that view.

Upbeat UK data

Last week’s IHS Markit/CIPS UK Purchasing Managers' Index (PMI) showed the UK’s key services sector swing back to growth in January for the first time since August, while the manufacturing slowdown eased.

“This Bank of England meeting follows a run of fairly weak economic data over the last few weeks but with last week's strong employment data and better than expected flash PMIs confusing the picture," said Deutsche Bank strategist Jim Reid.

In the medium term, the pound to Australian dollar forecast will hinge on how the pound will react to the news of the trade talks between the UK and the EU.

The British currency could be at risk to selling pressure if the two sides fail to reach a trade agreement by year-end.

Boris Johnson has made it clear that he wants the talks completed before 2021, which has prompted concerns the UK could face a hard Brexit given the short timeline for such complex trade discussions.

“In the UK, the year is unlikely to bring much reprieve from Brexit-related news,” said Jane Foley, head of foreign-exchange strategy at Rabobank. “Trade negotiations between the UK and the EU will dominate much of the domestic political landscape this year.”

FURTHER READING: GBP to USD prediction 2020 : is the pound going to rally?

FURTHER READING: USD to JPY forecast for 2020

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