Demand for the risk-sensitive ‘Aussie’ has been particularly volatile in recent days, as worries over the outcome of the UK’s EU membership referendum have intensified sharply. With a number of opinion polls having put the ‘Leave’ campaign out in front, investors were inclined to adopt a more risk averse attitude, although this anxiety was of greater influence on the Pound. The GBP/AUD exchange rate subsequently entered a slump, falling to 1.9087 before consolidation trading drove the pairing back up.
Optimism in the outlook of the Australian economy was not particularly enhanced by the latest NAB Business Confidence and Westpac Consumer Confidence surveys. Both measures showed a weakening in domestic sentiment, suggesting that negative headwinds could be having a more detrimental impact on economic conditions. Lower business confidence in particular is likely to drag on the local economy, with investment seeming less likely and growth expected to be stunted as a result.
Fed & BoE Policy Meetings Shored up GBP/AUD Exchange Rate
Although the Federal Open Market Committee (FOMC) opted to leave interest rates unchanged on Wednesday this did not offer the ‘Aussie’ any particular support. Markets were generally unsurprised by this decision, following the notably poor May Non-Farm Payrolls report, but the tone taken by the Fed was rather more dovish than anticipated. While the odds of a summer interest rate hike seemed to dwindle, policymakers’ emphasis on negative global headwinds saw the Australian Dollar slump. This rescued the GBP/AUD exchange rate from a monthly low of 1.9057, setting the pairing on a fresh uptrend.
Investors were not overly enthused by the latest Australian employment data, meanwhile, despite the fact that the employment change measure had bettered expectations. Even with the unemployment rate holding steady at 5.7% markets were inclined to overlook the strong showing, given the notoriously volatile nature of this particular report. As a result the antipodean currency remained on softer form on Thursday, with a surge in the safe-haven Japanese Yen following the Bank of Japan (BoJ) policy meeting also weighing on demand.
The Bank of England (BoE) once again left interest rates unchanged at 0.5% by a unanimous vote, with this decision having a limited impact on the Pound thanks to its predictable nature. This meeting was widely acknowledged to be more of a formality given its proximity to the referendum on the 23rd June, although markets were still keen to see the accompanying minutes. Policymakers reiterated previously stated concerns about the negative impact that a vote to leave the EU could have on the domestic economy, a signal that managed to shore up some additional demand for Sterling.
Pound to Remain Vulnerable to Brexit Uncertainty Ahead of Vote
Brexit-based volatility eased somewhat ahead of the weekend due to the temporary suspension of campaigning activity out of respect for the death of Jo Cox, Labour MP for Batley and Spen. With no domestic data released and silence from the ‘Remain’ and ‘Leave’ camps the Pound regained some of its lost ground. This upward momentum was maintained at the start of the new week, with Sterling on track for its biggest single-day gains of the decade thanks to the results of the latest opinion polls. As a result the GBP/AUD exchange rate reached a fortnightly best of 1.9631 on Monday morning.
Confidence in the Australian Dollar could recover on Tuesday if the June meeting minutes of the Reserve Bank of Australia (RBA) prove less dovish. If the central bank is shown to be more reluctant to consider cutting interest rates again in the near future then the ‘Aussie’ is likely to rally, especially given the decreasing likelihood of an imminent Fed rate hike. However, if policymakers continue to express uncertainty over the outlook of the domestic economy then the GBP/AUD exchange rate could extend its recent gains further.
However, the primary influence on the Pound, and markets in general, over the coming week will be the imminent EU referendum vote. If support for the ‘Remain’ campaign is seen to continue to build then the GBP/AUD currency pair is expected to remain on a stronger footing, while signs of a higher probability of a Brexit could see investors abandoning Sterling again. The ultimate result of the vote will be revealed on Friday, with the Pound expected to see sharp movement in response.