Foreign Currency Market Update – GBP / AUD Update
Over the last week the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate has fluctuated between lows of 1.8984 and highs of 1.9756 in response to central bank decisions and major political events.
While the Reserve Bank of Australia’s (RBA) interest rate decision drove GBP/AUD movement at the beginning of the week, it was the hotly-anticipated UK general election causing swings in the pairing from Thursday. As expected by economists, the Aussie central bank opted to slash the cash rate from 2.25% to a record low 2.0%, but the RBA decision had a curious impact on the Australian Dollar. Although an interest rate cut typically weakens the domestic currency, bets that this move signalled an end to the RBA’s easing cycle saw the ‘Aussie’ rally across the board. The Australian Dollar’s momentum lasted until the second half of the week as a better-than-forecast Chinese Services PMI and recovering iron ore prices outweighed the impact of subpar domestic retail sales and employment numbers.
However, the publication of the exit poll from the UK general election marked a turning of the tide for the GBP/AUD exchange rate. In the run up to the ballot, polls put the outcome of the landmark election as too close to call, and a hung parliament seemed like the most likely outcome. The Conservative and Labour parties were perceived to be neck-and-neck, and debate about which party would be left with the arduous task of forming a coalition exerted downward pressure on the Pound. The exit poll told a very different story, estimating that the Conservatives would actually secure 316 seats – just 10 seats short of the 326 needed to form a majority government. The prospect of a Tory-led government and a stabilising political climate saw the Pound spike and the Sterling to Australian Dollar exchange rate achieved 1.9174 following the poll’s publication.
The pairing extended gains on Friday as the level of Conservative backing exceeded all expectations and the party acquired 331 seats – enough to govern the country alone and maintain current fiscal policy – and the RBA published a dovish policy statement. Before the weekend the GBP/AUD exchange rate hit a high of 1.9657. On Monday the Australian Dollar’s bearish trend continued as the People’s Bank of China (PBoC) cut interest rates, an action which indicated that policymakers are concerned about the slowing pace of expansion in the world’s second largest economy.
Over the rest of the week China’s Industrial Production and Retail Sales reports could have an impact on Pound Sterling to Australian Dollar trading. Poor ecostats from Australia’s main trading partner would weigh on the ‘Aussie’ while upbeat data could lend the South Pacific currency some support. The Bank of England’s (BoE) Inflation Report and UK employment data will also have an impact. While the BoE left policy unaltered following Monday’s meeting, some economists are expecting the inflation report to contain positively revised growth and inflation projections – a development which would be Pound-positive. Similarly, the GBP/AUD exchange rate could hit fresh highs if the UK jobs numbers show a decline in unemployment or rise in average earnings. Based on current forecasts, the outlook for the Pound Sterling to Australian Dollar exchange rate is neutral-positive.
Heads Up
Summary of major upcoming data releases that we think may move the market.