Market volatility shows no signs of calming during the second week since the UK voted to leave the European Union, with GBP AUD undulating wildly on market speculation and fears.
Optimism Following ‘Brexit’ Chaos Short-Lived, GBP AUD Volatile
GBP AUD enjoyed several ‘dead cat’ bounces towards the end of last week, with the Pound seemingly immune to the multiple headwinds that were facing it. Multiple EU officials warned that the UK would not secure access to the single market without accepting free movement in return, while Fitch predicted a recession before the end of the year and JP Morgan forecast a rate cut from the BoE. Warnings that the recovery was temporary and not reflective of the current situation were quickly proved correct; GBP AUD closed the week around 1.7715 – its lowest level since the results of the referendum became apparent.
The Australian Dollar was largely in the grip of market sentiment over the past few days. Speculation over how the Reserve Bank of Australia (RBA) would act at the next policy meeting also weighed on the ‘Aussie’. Markets are largely agreed that the official cash rate will be cut at least once over the coming year, with many expecting rates will be slashed to 1% over the next few months. However, analysts were divided over whether or not the RBA would choose to cut policy immediately after the UK’s ‘Brexit’ decision or if it would delay.
Pound Australian Dollar Recovers Ground after Release of BoE Financial Stability Report
GBP AUD began the day in a positon of weakness, although speculation of further easing from the Reserve Bank of Australia (RBA) weighed on the ‘Aussie’. The RBA may have held rates at 1.75% and made no explicit suggestions of holding an easing bias, but investors were still betting on further cuts. Analysts interpreted comments on the need to await ‘further information’ as referring to the next consumer price index release, due at the end of July. The RBA has a history of cutting after inflation data is released, so this only stoked expectations of looser monetary policy, weakening the Australian Dollar.
The Pound was on a weaker footing, however, thanks to the approach of the Bank of England’s Financial Stability Report. Investors pulled out of the Pound ahead of the release on expectations of a dovish assessment of the UK’s financial situation. When the report was released, markets were cheered by the news that the BoE intended to relax capital restrictions on UK banks to allow them to lend more money. While the report highlighted many risks, it also reaffirmed that the Monetary Policy Committee (MPC) was ready and prepared to counteract them.
This bolstered market confidence. However, the Pound’s attempts to erase losses quickly floundered and turned back into a decline as a Commons Treasury Committee on the Brexit got underway. In particular, adding headwinds to the Pound were comments from University of Liverpool Professor of European Law Michael Dougan, who highlighted how difficult it would be for the UK to secure a ‘Norway style’ trade deal with the EU. Among other things, any deal can be vetoed by 32 different parties, including the 27 EU countries, the Swiss and the European Parliament.
GBP AUD Exchange Rate Forecast: UK Trade Balance in Focus after BoE Current Account Warning
Wednesday’s ISM Non-Manufacturing Composite index could benefit GBP AUD if it strengthens the US Dollar, thereby weakening the ‘Aussie’. Australian data for the rest of the week is sparse, with Thursday’s AiG Performance of Construction Index for June likely to be the most impactful. Also on Thursday are UK industrial and manufacturing production statistics, as well as the NIESR GDP estimate. It is likely that ‘Brexit’-related speculations will eclipse these data releases, however.
Friday’s UK data will likely have more clout. May’s trade figures are expected to show that the trade deficit widened from -£3.29 billion to -£3.57 billion. Considering the BoE today highlighted the UK’s current account as a major risk to stability following the UK’s vote to leave the European Union, a widening trade deficit will weaken investor sentiment.