Saxo Group
The GBP/AUD currency pair is one of the most fascinating to trade in the forex markets. Essentially, the GBP/AUD pair states how much one British pound costs in Australian dollars. This figure rises and falls based on the strength or weakness of the British and Australian economies.
The British pound is known as the ‘base currency’ in this forex pair. The Australian dollar is considered the ‘quote currency’. For example, if GBP/AUD was priced at 1.7880 in the financial markets, this means £1 would get you AU$1.78 in a basic foreign exchange transaction. If you regularly travel ‘down under’ or you’re just interested in adding a new pair to your forex trading arsenal, we’ll demystify the world of trading the GBP/AUD currency pair.
The GBP/AUD currency pair is important because of the history between these two nations. Australia remains an integral part of the British Commonwealth. That's why Britain sits comfortably in eighth place out of Australia’s top ten trading partners, despite being on the other side of the world from one another.
This ranking was also backed up by a recent comment from the UK government’s former International Trade Secretary and now Foreign Secretary, Liz Truss who said more than £46bn is invested between the British and Australian economies.
Although the British pound and the Australian dollar are considered two of the major currencies in the forex market, the GBP/AUD forex pair is actually a ‘minor currency’. A minor currency is a forex pair that does not include the US dollar as the base or quote currency. It’s true that minor currency pairs are often more illiquid than major currency pairs involving USD. Nevertheless, the opportunities for buying and selling GBP/AUD are still plentiful.
As with all other major and minor currency pairs in the forex market, GBP/AUD can be traded 24/7. Despite this, the GBP/AUD pair is most liquid during UK trading hours – 8am-5pm GMT. If you’re new to forex trading and GBP/AUD is the first currency pair you’re thinking of trading, it’s important to understand the mechanics of the market.
GBPAUD is known as the ‘ticker symbol’. It’s the nickname for the exchange rate between the pound and the Aussie dollar.
When GBPAUD is displayed on your forex trading platform, you’ll see numbers in two columns. The first column is the ‘bid price’. That’s the price available to sell GBPAUD. The second column is the ‘ask price’. The current ask price is the price at which you can buy GBPAUD.
Both values will fluctuate throughout a normal trading day. If you’re looking to trade GBPAUD seriously to earn a long-term income, you might want to trade these minor price fluctuations daily. It’s always a good idea to close your positions at the end of each day, re-evaluate and start again the following day regardless of whether you’re in a profitable or loss-making position.
It’s important for you to understand how much it costs to trade the GBP/AUD pair too. We’ve already explained what the bid price and the ask price are, but we haven’t touched upon why there is a gap between the two prices. The difference between the bid and ask price is known as the ‘spread’. The narrower the spread, the better. Especially for those looking to trade the small fluctuations in the price of GBP/AUD.
Spreads are usually tightest with the minor currencies involving USD, but they are also tighter for minor currencies when trading volumes are at their highest. There are two types of spreads you’ll experience when trading forex pairs like GBP/AUD: fixed spreads and variable spreads. Variable spreads are better for those thinking of taking a long-term approach to positions on GBP/AUD. That’s because you can ride out those periods of volatility more readily. Fixed spreads are better for day traders. That’s because you can be sure of how many pips your entry needs to move before it reaches profitability.
Pips are the price difference between the bid price and the ask price. A fixed spread may be two-to-three pips between the bid and ask prices, while a variable spread could be anything from one-to-ten pips depending on market conditions.
If you are day trading GBP/AUD with only a two-pip difference between the bid and ask price, your entry position only needs to move three pips in your favour to be profitable. That’s opposed to a variable spread of seven pips, for example, which would need an eight-pip swing to make a profit.
There are two ways to analyse the GBP/AUD currency pair and determine potential entry and exit points – fundamental analysis and technical analysis. We won’t go into too much detail about the latter, but you can always check out our introduction to useful technical analysis indicators to learn how to apply them to the GBP/AUD market.
There are three key factors when assessing the fundamentals of the GBP/AUD forex pair:
The value of the GBP/AUD currency pair is directly linked to the performance of the British and Australian economies. If either economy is booming and generating an impressive output - measured via gross domestic product (GDP) – overseas investors will be more inclined to put their money into an economy that can yield significant and consistent growth. Similarly, if either economy is stagnating or, worse still, edging towards recession, investors may look to move their funds out of the struggling economy elsewhere.
The British economy has faltered of late since the Brexit referendum and the UK’s departure from the European Union (EU). For the time being, this has made operating costs higher for some UK industries that are having to pay import tax on goods and services from outside the EU’s Single Market – the market comprising all 27 member states of the EU, along with the nations in the European Economic Area (EEA) and Switzerland. The Australian dollar benefitted from the Brexit vote in many ways, as the UK seeks to take a global approach to its trade links, particularly with those inside the Commonwealth.
The Australian economy is heavily reliant on precious commodities. The country is ripe with mining opportunities for coal, iron ore and several more commodities. When Australia’s exports are strong, that’s when the AUD starts to compare favourably with established base currencies like the GBP.
Interest rates determine the cost of loaning money. They also indicate how much can be earned from saving funds. The main factor is the ‘Bank Rate’ set by any central bank. This sets the tone for interest rates for all other forms of lending, including banks for business loans, mortgages and such.
When the Bank Rate rises, it becomes more expensive to borrow money, potentially inhibiting investors from taking out new loans to fund new infrastructure projects. When the Bank Rate falls, it becomes cheaper to borrow funds, encouraging investment.
A currency’s value can be bolstered or hampered by interest rates. Higher interest rates can improve returns on bonds and gilts for offshore investors, enticing overseas capital which in turn reinforces the local currency.
It’s also important to weigh up the power central banks have over the British and Australian currencies. The Bank of England is the central bank for the British pound, setting the base rate of interest and keeping a lid on the pound’s inflation. The Reserve Bank of Australia acts as a similar custodian for the Australian dollar.
In conventional economic circumstances, when the Bank of England or Reserve Bank of Australia seeks to increase interest rates, offshore investors are more likely to invest in the country as they will get a better rate of return. Similarly, declining interest rates are a sign of a faltering economy, resulting in overseas investors taking their investments elsewhere for better returns.
There is a unique scenario where rising interest rates may not always be a green light for offshore investors in the British or Australian economy – stagflation. Stagflation occurs when interest rates rise despite the economy showing signs of decline. It occurred in the British economy in the mid-to-late 1970s following the oil price crisis and is showing signs of a return during the gas price crisis of 2022 amid the Russia-Ukraine war.
One of the main reasons that the Australian dollar has been so consistent in the forex markets is down to its government debt-to-interest ratio. The interest rates to service its government debt are comparatively lower than the government debt of many other developed nations – including the UK.
There’s also the geopolitical backdrop to consider when trading the GBP/AUD currency pair. The influence of politics on a nation’s economy can be significant at times – as demonstrated by the UK’s Brexit vote in 2016, which caused significant weakness in the British pound against many other major and minor currencies.
As for Australian politics, its relationship with China has a significant bearing on the economy down under. A large percentage of Australian commodities exports head across the Pacific Ocean to China, so when China flourishes the Australian economy often does too. Australia is equally vulnerable to economic downturns in China too. China’s recent harsh lockdowns due to a rise in Covid-19 cases may have curbed investor confidence in AUD in recent months.
Both governments have also been hard at work developing a new ‘UK-Australia Free Trade Agreement’. The proposals, which are yet to be enacted, will ramp up Britain’s trade with Australia by 53%, according to the UK government. It would also provide a £2.3bn boost to the UK economy. Australia is also a keen champion of the UK entering the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which would open the door to a further 11 markets across the Indo-Pacific region.
The Australian dollar was inaugurated in 1966, with the country shifting its fiscal policy towards decimalisation and futureproofing its economy. Prior to this, the Australian pound had been in use since 1910.
The GBP/AUD currency pair has been in existence ever since February 1966, with the new Australian dollar decimalised and split into 100 cents per dollar. At the time of its launch, two new Australian dollars equalled one Australian pound.
Since shifting its imperial currency, the new Australian dollar has fared rather well against the British pound. Since the turn of the millennium, the price of AUD per £1 has fallen considerably. It reached highs of $2.90962 per £1 in September 2002 and fell to just $1.43810 per £1 in March 2013. This fall is a demonstration of the turbulence felt in the British economy (particularly since the 2008 recession).
The pound recovered soon after March 2013 against the Australian dollar, returning to highs of $2.18 to the pound in September 2015. However, the UK’s decision to leave the European Union saw the pound plunge once again against AUD to $1.61 to the pound in October 2016.
Since then, GBP/AUD had somewhat plateaued, with both economies experiencing significant headwinds caused by the Covid-19 pandemic.
The best time to buy GBP/AUD is when you think the British economy is on the up. When GDP is strong, inflation is at or near the Bank of England’s 2% target and interest rates are competitive enough to encourage investment, it’s a good opportunity to take a long (buy) position on GBP/AUD. With many online brokers, you can predict the next price moves of GBP/AUD without having to buy sterling or Aussie dollars off your own back. Using contracts for difference (CFDs) you can go long (buy) or short (sell) with assets like forex. Your profit or loss is the difference between your entry and exit points.
The best time to sell GBP/AUD is when you believe the Australian economy is booming. If you’re able to time this in conjunction with the weakening of the British economy, even better. It’s possible to sell (short) GBP/AUD using CFDs with a reputable online broker. This allows you to profit from the declining value of an underlying asset, such as a foreign currency. Determining your profit or loss from shorting an asset is the same as going long on it – it’s the difference between your entry and exit positions.
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