Demand for the ‘Aussie’ saw some substantial volatility ahead of the Reserve Bank of Australia’s (RBA) August policy meeting. Domestic data proved rather mixed, with a strong jump in the latest Manufacturing PMI contrasted by a weaker TD Securities Inflation estimate. Investors were prompted to sell out of the higher-risk antipodean currency, however, in the wake of a weaker Chinese Manufacturing PMI. The suggestion of a renewed slowdown in the world’s second largest economy helped to set the GBP AUD exchange rate on a fresh uptrend, with the pairing climbing higher as commodity values weakened.
Although it was generally expected, investors still reacted bearishly to the Reserve Bank of Australia’s (RBA) decision to lower interest rates from 1.75% to 1.50%. This was largely done in acknowledgement of the fact that the RBA’s 2% inflation target remains rather more distant than policymakers would like. Even so, it was not long before the ‘Aussie’ began to recover ground and drove the GBP AUD exchange rate to a low of 1.7400.
Markets were not encouraged, meanwhile, by the news that the UK’s July raft of PMIs had generally weakened by more than the flash figures indicated. The manufacturing sector was found to have contracted more severely than initially thought in the wake of the EU referendum, with the construction measure also showing a substantial downturn. Altogether this resulted in the Composite PMI recording its largest single fall in the survey’s history, with economic activity having weakened to levels not seen since 2009.
BoE Rate Cut Propelled GBP AUD Exchange Rate to Four-Week Low
Despite Australian retail sales unexpectedly weakening in the second quarter, the appeal of the ‘Aussie’ continued to improve on Thursday. The commodity-correlated currency benefitted strongly from disappointing US data, as a weaker US Dollar increased the appeal of the Australian Dollar. However, greater pressure for the GBP AUD exchange rate came in the shape of the Bank of England’s (BoE) latest policy meeting.
Expectations had been high for the BoE to cut interest rates to a fresh record low in response to Brexit-based uncertainty and the telling weakness of recent economic data, with much of the risk already priced into the Pound. Investors were taken by surprise, though, when the Monetary Policy Committee (MPC) opted to introduce a far wider raft of easing measures than anticipated. With a significant boost to quantitative easing amongst the tools deployed to minimise the impact of recent uncertainty on the UK economy, the Pound slumped sharply across the board.
Anticipation ahead of the July US Non-Farm Payrolls report helped to support the Australian Dollar further on Friday. Forecasts for a weaker level of new jobs created within the US economy increased demand for the higher-yielding ‘Aussie’, pushing the GBP AUD currency pair to a four-week low of 1.7098. But when the report was ultimately found to be far more bullish than expected, the antipodean currency fell out of favour with investors as speculation over the possibility of a 2016 Fed interest rate hike increased.
Weaker Chinese Inflation Could Weigh on Australian Dollar
Following weaker-than-expected Chinese trade data, hopes surrounding the outcome of the July Consumer Price Index have dimmed, which could put additional downside pressure on the ‘Aussie’ this week. If evidence of a slowdown in the Chinese economy continues to materialise then markets are likely to return to a state of risk aversion. As the NAB Business Confidence Index is also expected to show a weakening in sentiment then the Australian Dollar looks set to cede further ground.
Confidence in the Pound could recover if the June Industrial and Manufacturing Production figures prove encouraging. Even so, given that the data pertains to the pre-referendum period, the impact on Sterling could ultimately prove limited unless output is shown to have weakened in the face of uncertainty. On the other hand, the NIESR GDP estimate for July is expected to provoke some marked volatility for the GBP AUD exchange rate, with a weaker assessment of economic growth likely to discourage investors.