Markets were not surprised by the Reserve Bank of Australia’s (RBA) decision to leave interest rates on hold for another month, sticking with a record low of 2.00%. While Governor Glenn Stevens did not particularly attempt to jawbone, the Australian Dollar (AUD) nevertheless entered something of a rough patch, helping to push the GBP/AUD exchange rate to a weekly high of 1.8881 during Tuesday’s European session.
The appeal of the ‘Aussie’ was further undermined by an unexpected widening of the Australian trade deficit and the fact that the domestic Services PMI had fallen into contraction territory. As the Australian economy is attempting to move away from its current reliance on mining towards a more service-based footing this weakening did not offer much encouragement to investors.
While the UK’s Services PMI bettered expectations to rise from 52.7 to 53.7 in March this was not as well received by markets as might have been anticipated. Though the UK economy is mainly driven by the service sector and this stronger showing suggests greater growth, uncertainty linked to the EU membership referendum overshadowed any optimism. As a result the GBP/AUD pairing struggled to hold onto its gains, returning to a downtrend shortly thereafter.
Unexpectedly improved Chinese Services and Composite PMIs increased the appeal of the Australian Dollar further on Wednesday, raising hopes that the world’s second largest economy is beginning to stabilise somewhat. Commodity prices rallied in response, pushing the ‘Aussie’ up across the board as the odds of imminent RBA easing seemed to diminish. With little in the way of domestic data to shore up the Pound, the GBP/AUD exchange rate traded lower in the region between 1.8582 and 1.8762.
GBP/AUD Recovered Ground on Fed Speculation
After disappointing Australian construction data, the pairing bottomed out at a weekly low of 1.8519 as the ‘Aussie’ was unable to sustain its upwards momentum. Investors were somewhat discouraged by the increasing amount of hawkish dissent evident amongst the US Federal Open Market Committee (FOMC), as revealed in the latest meeting minutes. With speculation still rampant over the possibility of an imminent interest rate hike this prompted the antipodean currency to soften.
Although the UK’s latest trade figures revealed that the country’s visible trade deficit remained wider than forecast, clocking in at -11.9 billion Pounds rather than -10.2 billion, this did not prevent the Pound retaking ground ahead of the weekend. Consolidation trading shored up Sterling as investors were inclined to buy back into the softened currency.
A weaker-than-expected Chinese Consumer Price Index demonstrated that domestic inflationary pressure is struggling to pick up, dragging on the ‘Aussie’ on Monday morning. As a sales deal between Tata Steel and Greybull Capital was confirmed, potentially securing over 4,000 jobs at the Scunthorpe steel mill and associated facilities, the mood towards the Pound continued to improve in contrast. Consequently the GBP/AUD exchange rate was trending higher in the range of 1.8663 to 1.8856 at the beginning of the week.
AUD Predicted to Soften with Rising Unemployment Rate
Tuesday’s NAB Business Confidence Index could shore up the Australian Dollar, with expectations pointing towards a modest uptick in sentiment. However, demand for the ‘Aussie’ is likely to weaken ahead of the latest raft of Australian employment data. While investors anticipate a relatively strong increase in the number of employed the domestic Unemployment Rate is also forecast to rise from 5.8% to 5.9% in March. Should the Australian employment figures prove more bullish, though, the GBP/AUD currency pair is predicted to soften as lower unemployment would discourage the RBA from cutting rates in the near future.
Volatility can be expected for the Pound, meanwhile, with both the UK Consumer Price Index and Bank of England (BoE) policy meeting to give markets motivation for movement. Any improvement in domestic inflation could boost Sterling, offering reassurance that downside risks are not having such a severe impact on the economy. While policymakers are expected to leave interest rates on hold once again on Thursday any hawkish comments could still trigger a bullish run for the GBP/AUD exchange rate.
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