Markets were not overly impressed with the meeting minutes of the Reserve Bank of Australia’s (RBA) March gathering, as policymakers indicated that there remains scope for the central bank to ease in coming months. This contrasted with the more relaxed outlook that Governor Glenn Stevens had previously taken and, following on from the Reserve Bank of New Zealand’s (RBNZ) surprise rate cut, saw the ‘Aussie’ weaken in response.
A contraction in the Westpac Leading Index for February, which fell from 0.12% to -0.15%, equally gave investors little reason to favour the Australian Dollar on Tuesday. Confidence in the outlook of the Australian economy was shaken, particularly after the latest US data bettered expectations and encouraged speculation ahead of the Federal Open Market Committee’s (FOMC) latest rate decision.
Although Wednesday’s raft of UK employment data was largely positive, with a stronger-than-expected uptick in wage growth, this failed to boost the GBP/AUD exchange rate. Investors were predominantly focused on Chancellor George Osborne’s latest UK budget, which prompted a fresh flurry of debate over Osborne’s ability to achieve his much-vaunted national surplus by the end of the current parliament.
‘Aussie’ Shored up by Unexpectedly Dovish Fed
Taking pundits by surprise, the FOMC adopted a rather more dovish stance on monetary policy than had been expected. In focusing on negative global downside risks rather than recent bullish US data, the Fed signalled that the pace of monetary normalisation will be slower than previously suggested. As the Fed consequently revised its forecasts to incorporate just two interest rate hikes instead of four, a renewed bout of risk appetite shored up the Australian Dollar.
With the Fed looking substantially less hawkish, markets have been encouraged by the likelihood that the odds of a RBA rate cut may be reduced. As February’s Australian Unemployment Rate also unexpectedly dropped from 6.0% to 5.8%, this helped to push GBP/AUD to a new yearly low of 1.8674 during Thursday’s Australasian session.
Demand for the Pound improved somewhat in response to the Bank of England’s (BoE) latest policy decision, despite the Monetary Policy Committee (MPC) continuing to vote 9-0 in favour of leaving interest rates unchanged. Investors were encouraged by policymakers’ more positive assessment of the current health of the UK economy, regardless of expressed concerns over the negative influence of ‘Brexit’ worries.
CBI Report into ‘Brexit’ Risks Dents Pound Appeal
In spite of a USD resurgence, however, the Australian Dollar has been back on more bullish form at the start of the new week. After the Shanghai Composite Index reached a two-month high the appeal of the antipodean currency has improved, with hopes higher ahead of a speech from RBA Governor Stevens.
The Pound, meanwhile, was weighed down on Monday morning by a report from the Confederation of British Industry, which suggested that a ‘Brexit’ vote would result in 100 billion pounds of lost economic output and 950,000 fewer jobs. With the Conservative government also under pressure in the wake of a sharp U-turn on planned disability benefit cuts and the increasingly strained nature of Osborne’s budget, there has been little reason to buy into Sterling.
Nevertheless, the GBP/AUD exchange rate could find some support following Tuesday’s UK Consumer Price Index report, with traders anticipating a modest uptick in inflation from 0.3% to 0.4%. If domestic inflationary pressure continues to mount, albeit slowly, the Pound can be expected to recover some of its recent losses.
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