BoE’s Vlieghe Reinforces Case for Rate Rises - Pound Australian Dollar (GBP/AUD) Exchange Rate Fails to Capitalise
The Pound may have seen renewed strength on the UK’s post-Brexit prospects, but dismissive comments on Friday from EU Chief Negotiator Michel Barnier and the volatility that ensued revealed Sterling to still be very much under the thumb of Brexit-related news.
The Pound Australian Dollar (GBP/AUD) exchange rate remained encumbered on Monday, failing to capitalise on hawkish comments from Bank of England (BoE) Policymaker Gertjan Vlieghe as markets continued to digest Barnier’s assertion that a Brexit transition period is ‘not a given’.
Speaking on Monday at an event hosted by the Resolution Foundation think-tank, Vlieghe pointed to the pick-up in UK wage growth and the building strength in the global economy, effectively making the case for a rate hike in May.
This, however, only prompted a brief rise in demand for the Pound with markets still digesting the possibility that the UK and the EU could fail to reach agreement on factors such as citizens’ rights, the UK’s acceptance of new EU laws during any transition period and the ongoing disagreements over the Irish border.
These factors continued to limit Sterling’s upward potential, with investors especially sensitive to progress (or a lack thereof) on the Brexit front after the BoE asserted that an earlier-than-expected rate hike would be highly dependent on progress being made on any transition period.
Trump Investment Plan Liable to Cause Australian Dollar (AUD) Exchange Rate Volatility
The Australian Dollar (AUD) capitalised on a weaker US Dollar (USD) on Monday, but this could quickly change if the market reaction to US President Donald Trump’s infrastructure plan is upbeat.
Lacking much in the form of salient domestic data on Monday, markets quickly turned their attentions to the imminent unveiling of President Trump’s $1.5tn infrastructure plan.
The plan includes a $200bn commitment in federal funds over 10 years to use local and state tax dollars to improve America’s infrastructure.
Whilst the path through Congress may appear long and challenging – particularly in the wake of the recent US government shutdowns – there is a great deal of optimism in the US about the plan. Upgrading the crumbling US infrastructure will promote economic growth, both in terms of the rush of investment spending in the short term, and by boosting the capacity of the country to efficiently do business in the longer term.
Beyond this, if the plan appears to be inflationary then it will increase the chances of a hawkish move from the US Federal Reserve in March; an eventuality that markets are already starting to price in.
UK Inflation and Australian Employment in the Spotlight – What can we Expect for the Pound Australian Dollar (GBP/AUD) Exchange Rate?
Looking ahead there are a number of noteworthy events this week that could cause volatility for the Pound Australian Dollar (GBP/AUD) exchange rate.
The most anticipated of these is Tuesday’s UK consumer price index (CPI) readings for January, with markets expecting a drop in the year-on-year reading from 3.0% to 2.9%, but a rise in the core reading (which excludes volatile goods) from 2.5% to 2.6%.
The central bank tends to prioritise the core reading in their assessments, and any indication that inflation is still on the rise could push the Monetary Policy Committee (MPC) even further towards a rate hike in May.
On the Australian front, investors will be keen to assess Australia’s employment figures, with markets expecting unemployment to remain steady at 5.5%.
It should be noted, however, that wage growth data could prove to be the better indicator of future Reserve Bank of Australia (RBA) policy, particularly after RBA Governor Philip Lowe remarked that ‘a lift in wage growth is likely to be necessary for inflation to average around the [2-3%] inflation target.’