RBA Minutes Signal Rate Cut Imminent, but Inflation Data Undermines GBP AUD
After a relatively quiet start to the week, Tuesday saw turbulent GBP AUD exchange rate gains on the latest domestic developments for the UK economy.
The release of the Reserve Bank of Australia’s (RBA) latest meeting minutes initially weakened the Australian Dollar, after leaving the door open for further policy easing measures in the near-term. The markets widely took references to further data to indicate that the approaching consumer price index figures would be key in deciding the future of Australian monetary policy. With it highly unlikely that the latest CPI will reveal a strong acceleration in price growth, markets are pricing in a rate cut at the next policy meeting.
This helped GBP AUD make a 1% gain, rising to 1.7623, although fortunes were quickly reversed.
The path of inflation was also weighing on the Pound, although in this instance the issue was that inflation was too strong. Markets were initially cheered to see a better-than-expected rise in price growth from the final pre-Brexit consumer price index. However, it was quickly realised that this strong inflation would exacerbate the effects of the freshly-weakened Pound on consumer prices, potentially making the likely surge in inflation even more extreme.
As a result, GBP AUD slumped, ending the session having relinquished all the day’s earlier gains.
Pound Crashes Back Towards Previous Lows on Dire PMI Results
Australian domestic data for the rest of the week was fairly weak, with the Westpac Leading Index declining from 0.23% to -0.22% and skilled vacancies growth slowing from 1% to 0.8% on Wednesday. Commodities were declining again for the fifth consecutive session, further weakening the Australian Dollar.
A surprising surge in job creation in the UK during the three months to May saw the ILO unemployment rate unexpectedly drop, pushing the Pound to a fresh weekly high of 1.7752. Investors were relieved that businesses had not suspended hiring or reduced their workforce as had been feared in the approach to the Brexit referendum.
Once again, the Pound swiftly ceded some of its gains when Thursday’s UK retail sales for June printed significantly worse-than-expected. Monthly sales declined -0.9%, rather than -0.6% as predicted, while annualised sales growth slowed from a downwardly revised 5.2% to 3.9%, almost a whole percentage point worse than initially forecast. Pound Sterling dropped back to around the level of Tuesday’s high following the release of the data.
An initial recovery to a three-week high of 1.7762 early on Friday morning quickly turned into a rout after the first Markit PMIs to measure the UK economy since the referendum were released. The manufacturing index did not fall as far into contraction territory as was expected, printing at 49.1, but investors were more concerned by the services index, as this represents around 80% of UK economic growth. The index dropped from 52.3 to 47.4, significantly below the forecast 48.7. The composite index also performed worse-than-anticipated, declining to 47.7 instead of 48.5.
Pound Australian Dollar Exchange Rate Forecast; Australian Inflation and UK GDP Data Key on Wednesday
Wednesday’s second-quarter inflation data for Australia will be carefully watched by investors. After declining -0.2% in the first quarter, consumer prices are predicted to grow 0.4% on the quarter, while weakening from 1.3% to 1.1% on the year. These results are highly likely to prompt the RBA to cut interest rates at their next meeting, so an as-forecast or worse print here could see the Australian Dollar tumble.
Wednesday is also a key day for the UK, with finalised second-quarter GDP figures due for release. Earlier estimates are expected to be revised ten basis points higher in both fields, which would be a welcome development given everything that happened last week. Should the figures be revised lower, the Pound will likely drop. Even a strong printing could cause investors to pull out of the Pound, thanks to concerns that the UK has thrown away economic prosperity thanks to the Brexit vote.