GBP/AUD Exchange Rate Fails to Hold Post-Referendum High as Markets Rush to Buy Cheap Australian Dollar
The end of the first quarter of 2017 provided the GBP/AUD exchange rate with a boost last week, with Sterling demand increasing as investors adjusted their portfolios ahead of the second quarter.
Having spent weeks faced with heavy selling pressure on Brexit fears and concerns about the UK economy, in particular the impact its performance will have upon the monetary policy outlook, markets were re-evaluating the Pound and adjusting their portfolios accordingly.
A fresh inspection of the fundamentals saw many investors conclude that GBP was undervalued, given that significant progress has been made in the Brexit negotiations since the start of this year and the outlook for monetary policy seems more upbeat.
Key factors in improving sentiment towards the Pound over the past quarter included the joint UK-EU publication of a draft Brexit treaty and fresh clarity regarding the government’s negotiating aims following a new speech from Prime Minister Theresa May.
On the monetary policy front, the Bank of England (BoE) has improved the interest rate outlook after comments that borrowing costs may need to rise sooner and to a greater extent than markets are currently expecting caused investors to price in an interest rate hike for the May meeting.
GBP/AUD Exchange Rate Rebounds after Sell-Off on China Trade Tariff Fears and Cautious RBA Policy Statement
Fears of a global trade war have been weighing on the Australian Dollar for the past few weeks, with the GBP/AUD exchange rate being pushed to a post-referendum high last week as it became increasingly likely that China would levy retaliatory tariffs upon US imports in response to the latest protectionist moves by President Donald Trump.
As an export-focused economy, Australia is vulnerable to shocks that could be caused by a tightening of global trade conditions, so the Australian Dollar has struggled in the weeks since Donald Trump announced plans to levy tariffs on imports of steel and aluminium - not just because Australia accounts for over half of the world’s annual iron ore exports.
However, striking such a low point has made the Australian Dollar an attractive investment for speculators, who believe that the currency has bottomed out and that a recovery is now likely.
This has provided fresh tailwinds for the Australian Dollar that even significant downside developments have been unable to quell.
The latest monetary policy meeting from the Reserve Bank of Australia (RBA) has seen interest rates frozen for the 20th consecutive month, while the accompanying policy statement noted the risks of a trade war and pointed out that higher funding costs in the US was having a knock-on effect upon Australian borrowing costs, creating even more barriers to an interest rate hike.
The Royal Bank of Canada’s (RBC) head of Australian economic and fixed-income strategy Su-Lin Ong explained:
‘The RBA acknowledged higher funding costs and the increased concern around US trade policy but stopped short of much explanation or any forward thoughts. Coupled with the additional reference to a steady unemployment rate underpinning considerable slack, and the overall tone of today’s statement erred on the dovish side.’
UK PMIs and Australian Trade Balance to Keep Domestic Issues in Focus for GBP/AUD Exchange Rate until US Payrolls Report?
Domestic developments for the UK and Australia are likely to have a controlling influence on the GBP/AUD exchange rate until the vital US jobs data on Friday steals focus, although markets will nonetheless keep one eye on the US data calendar, given that several other high-impact releases are due for publication in the coming sessions.
Today’s UK Markit manufacturing PMI has bettered expectations by holding above 55 instead of falling to 54.7 as forecast; the Pound could find some support on market hopes that similar resilience will be demonstrated in tomorrow’s construction and Thursday’s services and composite indices.
Meanwhile, the Australian Dollar could see some volatility after tomorrow’s early morning release of ANZ Roy Morgan weekly consumer confidence index figures and February’s building approvals and retail sales data.
Thursday’s early-morning February trade balance figures could also have a strong influence; in this case working in favour of the GBP/AUD exchange rate, given that the surplus is expected to fall by around -AU$300 million to AU$725 million.
However, Friday will see elements in the US taking precedent, as not only is the vital change in non-farm payrolls report and unemployment data set for release, but Federal Reserve chair Jerome Powell is set to give a speech on the US economic outlook in the early evening.