The beginning of January has seen the Pound Sterling to Australian Dollar exchange rate largely recover from the six-month low of 2.0179 the pairing hit at the end of 2015. This was due, in no small part, to the marked volatility with which Chinese stock markets opened the year, with the Shanghai Composite Index closed early twice as shares rapidly fell by the 7% daily maximum. China’s economy showed further signs of weakness as both the December Manufacturing and Service PMIs fell significantly short of forecast, signalling the tenth straight month of contraction within the manufacturing sector. As risk appetite and commodity prices naturally declined on the back of these discouraging developments the ‘Aussie’ was equally pulled lower.
Confidence in the strength of the Australian economy, meanwhile, was undermined by disappointing local Manufacturing and Services PMIs, with the domestic service sector remaining stubbornly within contraction territory. Due to base metals sinking in response to negative global headwinds this weakness within other areas of the antipodean economy did not particularly encourage pundits, particularly with the prospect of further Federal Open Market Committee (FOMC) interest rate rises and a stronger US Dollar on the horizon.
Sentiment towards the Pound, however, began to take more of a downturn during the latter part of the week as a disappointing Services PMI raised questions as to the UK’s continued economic recovery. Chancellor of the Exchequer George Osborne did not do much to reassure traders on Thursday as he highlighted that the domestic economy faces a ‘cocktail of threats’ in the coming year, with downside pressures likely to drag on GDP. As this more dovish tone contrasted markedly with Osborne’s more optimistic Autumn Statement pundits took some concern from these comments.
As Friday’s UK Visible Trade Balance failed to narrow quite as far as forecast, printing at -10.6 rather than -10.5 billion Pounds, Sterling has continued to lack any particular support from domestic data. The currency has remained on a bearish trend after the weekend as the latest British Retail Consortium (BRC) Like-For-Like Sales plus Manufacturing and Industrial Production figures all proved disappointing. Of particular concern was the sharp contraction in manufacturing output which suggested that overseas demand for British-made products was strongly declining as the global economy slows. This helped to push the GBP/AUD exchange rate lower as pundits were inclined to dial back their expectations for the date of the Bank of England’s (BoE) first interest rate move as policymakers continue to lack sufficient incentive to tighten monetary policy.
While a surprisingly bullish US Non-Farm Payrolls report had initially seen the ‘Aussie’ weaken the antipodean currency has since recovered some of its steam, thanks to a lack of wage growth prompting speculation that the FOMC will hold off on another rate hike for at least a little longer. However, the GBP/AUD exchange rate could be in store for a boost on Thursday if December’s Australian unemployment data is found to demonstrate a decline in employment after the unexpectedly strong showing in November.
Thursday’s BoE interest rate decision will also be of particular interest to traders, although the Monetary Policy Committee (MPC) is expected to remain on an 8-1 split in favour of leaving interest rates unchanged. Should policymakers give a more hawkish assessment of conditions, however, the Pound is likely to see a substantial boost in demand.
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