In a move that surprised many analysts, the Reserve Bank of Australia (RBA) slashed the overnight cash rate, causing Australian Dollar exchange rates to tumble.
China Woes Add to Australian Dollar Exchange Rate Headwinds
Whilst below-target inflation and an overvalued trade weighting has impacted significantly on Reserve Bank of Australia interest rate decisions in the past, few analysts predicted a -25 basis point cut this month.
What’s more, several analysts agree that the cut to the record-low 1.75% will not be enough to combat the absence of inflationary pressure. As such, RBA policymakers are expected to cut the overnight cash rate again, possible in the third-quarter.
As a result of the surprise move, the Australian Dollar dived versus its major peers, falling by over 1.5% against the UK Pound despite weak British data.
Further weighing on demand for the ‘Aussie’ (AUD) was disappointing data out of China which caused risk-appetite to dampen significantly. April’s Chinese Manufacturing PMI was forecast to edge higher from 49.7 to 49.8, but the result actually dropped further to 49.4. Anything below the 50 mark is contraction.
The dampened market sentiment did cause gold prices to edge higher during Tuesday’s European session, but this had minimal impact on the ‘Aussie’.
GBP/AUD Exchange Rate Surges despite Poor British Manufacturing Data
The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate advanced considerably on Tuesday, although the UK unit is holding losses versus both the Euro and US Dollar.
In the initial stages of Tuesday’s European session the UK Pound extended gains versus nearly all of its major peers as ‘Brexit’ concerns eased in response to endorsement for the ‘Remain’ campaign by various political heavyweights.
However, the British Pound cooled from intraday highs as the session progressed after domestic data failed to inspire continued positive sentiment.
April’s UK Manufacturing PMI was forecast to improve from 50.7 to 51.2, but the result actually dropped to 49.2. As mentioned above, anything below the 50 mark on indices shows contraction. Whilst manufacturing does not account for a large portion of the UK’s gross domestic product, the weak result piles extra pressure on the services sector to carry UK economic growth.
Australian Services Data to Provoke AUD/GBP Exchange Rate Volatility
Given the absence of further domestic ecostats for the remainder of Tuesday’s trade, the AUD/GBP exchange rate is likely to hold losses. This is especially true given the extent of the ‘Aussie’ depreciation.
Looking ahead to the Australasian session, however, the Australian Dollar is likely to see volatility in response to the Performance of Service Index for April. Wednesday’s European session will also see the publication of British construction data that is likely to impact on the AUD/GBP exchange rate.
Traders will also be looking out for the US Non-Manufacturing Composite as it has potential to impact on the wider currency market.
Over the past week, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was trending within the range of 1.8795 to 1.9443.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
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