Risk Aversion Weighs On AUD

The Pound to Australian Dollar (GBP/AUD) exchange rate edged higher on Monday as a cautious market mood weighed on demand for risk-sensitive currencies.

DAILY RECAP:

The Australian Dollar (AUD) struggled on Monday as a cautious tone dominated markets, leaving the risk-sensitive ‘Aussie’ exposed to losses against safer peers.

Risk appetite deteriorated amid renewed concerns over the independence of the US Federal Reserve, after the US Department of Justice confirmed it had launched a criminal investigation into Fed Chair Jerome Powell.

Markets remain uneasy that the probe could be politically motivated, with President Donald Trump having repeatedly criticised Powell for not cutting interest rates aggressively enough. Investors fear the situation could undermine the credibility and independence of the world’s most influential central bank.

Geopolitical concerns also weighed heavily on sentiment. Over the weekend, Trump reiterated that the US would take Greenland “one way or the other”, fuelling fears of potential military action against NATO ally Denmark.

At the same time, reports that Washington is considering ‘very strong’ measures against Iran, following Tehran’s crackdown on protests, added to concerns that tensions in the Middle East could escalate.

These combined risks dampened demand for higher-yielding currencies such as the Australian Dollar.

Meanwhile, the Pound (GBP) traded with modest gains despite a lack of UK economic data. With many of Sterling’s peers facing headwinds, GBP was able to edge higher by default, benefitting from its relative insulation from the day’s geopolitical flashpoints.

Near-Term GBP/AUD Forecast: Australian Confidence Data to Test the ‘Aussie’?

Looking ahead, the next potential catalyst for the Pound Australian Dollar exchange rate will be Australia’s latest consumer confidence index, due overnight.

Household morale is forecast to improve in January, with the index expected to rise from 94.5 to 97. A stronger-than-expected reading could offer the ‘Aussie’ some respite and cap GBP/AUD gains.

Beyond this, broader market sentiment is likely to remain the dominant driver. If geopolitical risks intensify or concerns over Federal Reserve independence continue to unsettle investors, the risk-sensitive Australian Dollar may remain vulnerable, potentially allowing the Pound to extend its gains.

Conversely, any easing of global tensions or improvement in risk appetite could see GBP/AUD drift lower as investors rotate back into higher-yielding currencies.