Some measure of doubt continued to overshadow the outlook of the Australian economy after the fourth quarter Wage Cost Index unexpectedly dipped last week. Wage growth slowed from 2.3% to 2.2% on the year, suggesting that inflationary pressure was failing to strengthen as forecast and increasing speculation that the Reserve Bank of Australia (RBA) could be prompted to cut interest rates imminently.
As slowdown fears continue to drag on global markets the Australian Dollar remained in more volatile form last week, helping to cushion the strong downtrend of the GBP/AUD exchange rate. The intensifying debate over the UK’s future in the European Union acted as a persistent downside drag on the Pound, as investors were deterred by the increasingly uncertain outcome of June’s referendum.
The second estimate of the UK’s fourth quarter GDP was somewhat mixed, with stronger quarterly growth outweighed by a downward revision of the yearly figure from 2.1% to 1.9%. As exports contracted and the service sector remained responsible for the bulk of the domestic economy’s strength this prompted the Pound to sink further.
With the UK’s growth prospects looking more limited ahead of the June vote the chances of the Bank of England (BoE) opting to begin tightening monetary policy continued to recede. Pundits have also speculated that the BoE could be prompted to cut interest rates if the UK votes to leave the EU, spurring the GBP/AUD currency pair downwards.
GBP/AUD Hit Nine-Month Low after Disappointing Confidence Survey
Demand for the ‘Aussie’ picked up further on Thursday following a surprisingly strong fourth quarter Private Capital Expenditure report, which encouraged greater confidence in the resilience of the Australian economy. Capital investment jumped from -8.4% to 0.8%, indicating that local companies were generally more confident at the end of 2015 in spite of weakening global market sentiment.
Ahead of the weekend the GBP/AUD exchange rate was driven to a fresh nine-month low of 1.9276 by a discouraging GfK Consumer Confidence Survey. Falling short of expectations, sentiment weakened from 4 to 0 in February, reflecting the less optimistic outlook of consumers amidst renewed stock volatility and ‘Brexit’ uncertainty.
However, as the latest US GDP and Personal Consumption Expenditure data was found to have strengthened, the antipodean currency was unable to hold onto its gains. With the Federal Open Market Committee’s (FOMC) preferred measure of domestic inflation rising from 1.5% to 1.7% in January the odds of a near-term interest rate hike were seen to increase once again. Consequently, the bullishness of the US Dollar weighed heavily on the ‘Aussie’ towards the end of Friday’s European session.
Australian Dollar Falters despite RBA Interest Rate Hold
Although the RBA chose to leave interest rates unchanged at its March meeting the GBP/AUD exchange rate has nevertheless returned to an uptrend on Tuesday. Policymakers indicated that their dovish bias is increasing, despite the hold, with the heightening likelihood of another rate cut to come weakening the Australian Dollar.
Despite a disappointing UK Manufacturing PMI, which showed the sector slowing from 52.9 to 50.8, the Pound has been boosted at the start of the week by a round of trader consolidation. However, if the latest domestic Services PMI proves equally weak the GBP/AUD exchange rate is expected to soften.
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