Markets were inclined to further dial back their predictions for the timing of a potential Reserve Bank of Australia (RBA) interest rate cut as the minutes of the April policy meeting revealed a relatively relaxed outlook. Although policymakers noted increased global economic uncertainty and expressed some discomfort with the higher levels of the Australian Dollar there was not much discussion of an imminent rate cut. With this tone echoed later on Tuesday in comments from RBA Governor Glenn Stevens the GBP/AUD exchange rate trended lower in the region of 1.8413.
Demand for the Pound was sharply dented by Wednesday’s unimpressive raft of UK employment data. Domestic unemployment increased for the first time since August 2015, a discouraging sign even though the uptick of 21,000 did not materially impact the corresponding Unemployment Rate. Of slightly more concern was the news that average weekly earnings had unexpectedly slowed, dipping from 2.1% to 1.8% in the three months through February.
While the Bank of England (BoE) had already stated an intention to maintain a dovish outlook ahead of June’s EU membership referendum, this result further reduced the likelihood of the central bank beginning to tighten monetary policy in the near future. Wage growth remains a particular concern of the BoE, with a stronger acceleration in wages needed to support the raising of interest rates. As a result the GBP/AUD currency pair continued to retreat.
GBP/AUD Hit 16-Month Low after Disappointing UK Data
Although the NAB Business Confidence Index showed that sentiment in Australia had weakened slightly in the first quarter, this failed to particularly weigh on the ‘Aussie’. Despite the modest headline figure the accompanying report indicated that the domestic economy was making solid progress, with an increasing shift away from the declining mining sector. Consequently the antipodean currency was boosted across the board, also benefitting from increased market risk appetite.
Thursday morning saw the GBP/AUD exchange rate slump to a sixteen-month low of 1.8305 as the Pound came under renewed pressure from poor retail sales and public finance data. Chancellor of the Exchequer George Osborne was somewhat embarrassed by the news that the UK had overshot its borrowing target for the 2015-2016 fiscal year by 1.6 billion Pounds. With the Chancellor’s pledge to erase the UK’s deficit by the end of 2020 looking increasing unfeasible the appeal of Sterling declined further.
However, ahead of the weekend the Pound saw an unexpected surge across the board as US President Barack Obama waded into the ongoing ‘Brexit’ debate. Obama expressed his belief that the UK should remain within the European Union, also stressing that a new trade deal with the US would likely take up to ten years to negotiate. As the latest round of polls also pointed towards a healthier lead for the ‘Remain’ campaign confidence in the Pound soared, pushing the GBP/AUD exchange rate to a weekly best of 1.8696.
Steady Australian Inflation to Support ‘Aussie’
After a slightly quiet start to the week the Australian Dollar is expected to see some renewed volatility on the back of the first quarter Australian Consumer Price Index. Inflationary pressure is forecast to have remained steady on the year at 1.7%, a result which would likely offer extra reassurance to the ‘Aussie’. However, should inflation weaken this could prompt renewed speculation over the outlook of the RBA.
Meanwhile, first quarter UK GDP is forecast to have weakened slightly from 2.1% to 2.0% on an annual basis. Slowing within the domestic economy is unlikely to offer any particular reassurance to investors, particularly given the negative impact that recent referendum uncertainty is expected to have had on growth.
Heads Up
Summary of major upcoming data releases that we think may move the market.