The release of minutes from the Reserve Bank of Australia’s (RBA) May policy meeting prompted investors to buy back into the ‘Aussie’ last week as policymakers were shown to have been somewhat reluctant to cut interest rates. This less dovish tone seemed to suggest that the central bank will be in no hurry to loosen monetary policy again in the near future, improving confidence in the antipodean currency.
Confidence in the Pound, meanwhile, was sharply undermined by the April Consumer Price Index report. Domestic inflationary pressure was found to have weakened further than anticipated, dipping from 0.5% to 0.3% on the month. While many were quick to attribute this slowdown to uncertainty over the EU membership referendum, however, there were concerns expressed that the underlying fundamentals of the UK economy could be faltering.
Nevertheless, this weaker showing did not ultimately keep the GBP/AUD exchange rate on a downtrend for long. An unexpected decline in the first quarter Australian Wage Cost Index saw the ‘Aussie’ fall rapidly out of favour with investors, reigniting speculation that local economic conditions are less than bullish. Weaker wage growth is likely to increase the chances of the RBA cutting rates again sooner rather than later.
Lower Odds of ‘Brexit’ Pushes GBP/AUD Exchange Rate Higher
An IPSOS MORI poll helped the Pound to extend its gains against the antipodean currency further on Wednesday, as the lead of the ‘Remain’ campaign was indicated to have widened with support of 55% to the ‘Leave’ camp’s 37%. Given the prominent market concern with regards to referendum-based uncertainty, this more decisive result led to a strong surge in demand for Sterling. Confidence was also bolstered by an unexpected improvement in the UK’s average weekly earnings in the three months to March, which raised hopes of the Bank of England (BoE) raising interest rates sooner rather than later.
This bullish run was extended by a particularly strong April Retail Sales figure, as consumer spending rose by 4.2% rather than 2.0% on the year. Suggesting that ‘Brexit’ concerns have been having a more limited impact on the UK economy than previously thought, this pushed the GBP/AUD exchange rate to a fourteen-week high of 2.0346.
Thursday also saw the Australian Unemployment Rate better expectations, holding steady at 5.7% rather than rising to 5.8% as forecast. However, this failed to particularly ease market worries over the likelihood of the RBA being prompted to cut rates again in the near future. Domestic unemployment figures have been notably volatile in recent months, undermining investor confidence in the measure.
Hawkish Fed and Dovish RBA Comments Weigh on Australian Dollar
Nevertheless, the ‘Aussie’ began to regain some ground ahead of the weekend as a round of heavy profit taking softened the Pound. In spite of hawkish commentary from members of the Federal Open Market Committee (FOMC) the appeal of the commodity-correlated currency recovered somewhat. Although Fed policymakers have recently been talking up the possibility of two or three interest rate hikes before the end of the year, markets remain somewhat sceptical over the odds of such a prospect.
At the start of the new week the Pound rallied strongly once again, bolstered by the release of another ‘Remain’-supportive opinion poll. Consequently, in spite of the UK missing its borrowing target for the 2015-2106 fiscal year, the GBP/AUD exchange rate climbed to a fresh fifteen-week high of 2.0433.
A speech from RBA Governor Glenn Stevens failed to offer particular encouragement to the Australian Dollar on Tuesday, with markets interpreting the policymaker’s committal to the central bank’s inflation target as a dovish signal. With the door apparently held open for further monetary loosening investors are likely to react more bearishly to any downside surprises in upcoming Australian data. The antipodean currency also remains exposed to pressure from the strengthening US Dollar, with further signs of an imminent rate hike expected to weigh heavily on the higher-risk currency.