Foreign Currency Market Update – GBP / AUD Update
Last Tuesday’s session saw the Pound Australian Dollar exchange rate drop to its lowest level for two months. The pair plunged to as low as 1.8830 during the early part of the European session as investors moved to price-in the latest UK inflation numbers which showed that the pace of domestic price rises had stalled to an annualised zero per cent last month. Market participants inferred from the figures that the Bank of England (BoE) will not be in a position to countenance an interest rate hike any time soon, so the data added new credence to comments which preceded the release from BoE Chief Economist Andy Haldane that that the next move in British interest rates might even be a cut.
Bank of England rate-setters spent the remainder of the week busily attempting to recalibrate investors’ expectations on the future direct of British interest rates. Friday’s session saw BoE Governor Mark Carney confirm at a conference in Germany that he fully expects the next change in policy to be a rate increase, while Deputy Governor Ben Broadbent conceded in a weekend newspaper interview that a rate cut remained a possibility for the Bank, but described such a move as unlikely. With the next set of CPI inflation numbers almost certain to reveal that Britain’s economy has slid into deflation, the short-to-medium term prospects for the Pound appear relatively dim.
May’s UK General Election provides another drag on the Pound; opinion polls suggest that, following this parliament’s wide-ranging boundary changes to the nation’s constituencies, an overall majority for either major party is unlikely. Some analysts feel that another Conservative-led coalition would harm the Pound as it would make a UK exit from the European Union more probable, while others suggest that a Labour-led government would be viewed by the markets as non-business friendly and would equally weigh down Sterling. Whatever the outcome, it appears doubtful that the UK unit will benefit from the popular poll which takes place in under 40 days. If expectations of a British interest rate cut also increase during this time, adding to the political uncertainty, then GBP AUD may track lower towards its 2015 low of 1.8343.
However, with the Reserve Bank of Australia (RBA) anticipated to cut its own interest rate at least twice between now and the end of the year, the Aussie remains susceptible to downside pressure. Thursday morning’s Australian trade balance figures could serve to re-enforce investors’ expectations regarding the RBA’s next policy move. Meanwhile, Friday’s US labour market data could also prove seminal for the Aussie; market participants are expecting US interest rates to remain low for months to come following recent comments from the Federal Reserve. Another strong showing from the job creation element of the March numbers could convince investors that American rates will be heading higher sooner, hitting the risk-driven Aussie and potentially sending GBP AUD back up towards its March peak of 1.9857.
Heads Up
Summary of major upcoming data releases that we think may move the market.