Foreign Currency Market Update – GBP / AUD Update
Pundits initially reacted with some uncertainty to the December meeting minutes of the Reserve Bank of Australia (RBA). While policymakers demonstrated continued faith in the recovery of the domestic economy and its shift towards a post-mining state, they nevertheless failed to rule out the possibility of another interest rate cut in the coming months. As a result, amidst a fresh round of commodity price declines, the Australian Dollar was generally softened across the board.
However, in spite of the UK Consumer Price Index returning to positive territory in November the Pound Sterling to Australian Dollar exchange rate began to cede its recent gains later on Tuesday. Although baseline domestic inflation climbed from -0.1% to 0.1% on the year this remains substantially short of the Bank of England’s (BoE) target of 2%. As traders anticipate that inflationary pressure will remain relatively subdued, with the continued possibility of fresh contraction, the Pound soon returned to a more bearish footing.
Ahead of the Federal Open Market Committee’s (FOMC) final policy meeting of 2015 the ‘Aussie’ saw some fresh gains, with risk sentiment rising in spite of the possibility of an imminently strengthened US Dollar. Due to markets having already largely priced in the impact of a Fed rate hike, movement after the FOMC’s decision was ultimately a little subdued, with the antipodean currency buoyed by the more dovish tone of Chair Janet Yellen. As it was stressed that any future interest rate hikes would be gradual and dependent on continued positive US data traders were generally reassured, driving higher-risk currencies up and the GBP/AUD exchange rate down.
As Thursday saw November UK Retail Sales significantly better expectations, rising 3.9% on the month rather than showing slowed growth of 2.3%, the Pound resumed a more bullish trend. This stronger performance suggested that consumer spending had picked back up after a somewhat disappointing October figure, boosting confidence in the domestic economy. With the Australian Dollar increasingly weighed on by the strengthening ‘Greenback’ this saw the GBP/AUD pairing trend higher ahead of the weekend.
Traders were disappointed to find that the November UK Public Sector Net Borrowing figure was decidedly larger than expected, clocking in at 13.6 billion Pounds rather than 11.1 billion. Indicating that the government deficit has continued to widen, this unimpressive result suggests that Chancellor George Osborne will struggle to meet the fiscal targets set out in the Autumn Statement. Boding ill for the UK economy, this prompted the Pound to generally retreat throughout the European session on Tuesday.
While the upcoming Christmas holiday means that domestic data for both Australia and the UK is relatively limited over the rest of the week, Wednesday is likely to see some fresh volatility for the GBP/AUD exchange rate. Should the upcoming US Durable Goods Orders report show the substantial weakening in output forecast, the ‘Aussie’ could be shored up further as a result of fresh US Dollar softness.
Heads Up
Summary of major upcoming data releases that we think may move the market.