After a somewhat hawkish speech from Federal Reserve Chair Janet Yellen the Australian Dollar came under increasing pressure, with risk sentiment waning in the face of a potentially imminent Fed interest rate hike. The appeal of the antipodean currency was undermined further by a weakening in the ANZ Roy Morgan Weekly Consumer Confidence Index, suggesting that sentiment within the domestic economy has begun to deteriorate once again.
Demand for the Pound, meanwhile, was boosted by an unexpected uptick shown by the Nationwide House Prices survey. Investors had expected the domestic housing market to remain under pressure in the wake of the EU referendum result, leading to a marked increase in confidence when prices were found to have strengthened further instead. This furthered the impression that the UK economy has been recovering in the wake of the Brexit vote, encouraging investors to pile back into Sterling.
Although the ‘Aussie’ was initially knocked back on Thursday by a poor domestic Manufacturing PMI, which slumped from 56.4 to 46.9, it was not long before the antipodean currency recovered some ground. Risk appetite strengthened in response to an unexpectedly improved Chinese manufacturing result, as the sector was shown to have edged back into growth territory in August. With the world’s second largest economy seeming to have escaped the threat of a hard landing, for the time being at least, the price of commodities such as iron ore rallied sharply. This helped to shore up the Australian Dollar, eclipsing the day’s disappointing domestic data.
A strong rally was in store for the GBP AUD exchange rate, however, when the UK Manufacturing PMI for August substantially bettered forecast. While markets had generally anticipated a modest improvement in the measure, following the sharp slump seen in the wake of the Brexit vote, there was some surprise when the index was found to have rebounded from 48.3 to 53.3. This significant recovery in sector growth prompted the Pound to surge, with the GBP AUD currency pair rising to a six-week best of 1.7657.
GBP AUD Exchange Rate Lost Ground on Softer US Data
The positive mood towards Sterling was boosted ahead of the weekend by a solid recovery in the corresponding Construction PMI. However, as this measure remained in contraction territory at 49.2 the impact of the result was a little more muted than the bullish manufacturing data. As a result the Pound began to weaken once again, with investors encouraged to engage in a fresh round of profit taking.
Confidence in the Australian Dollar was shored up by the weaker headline figure of the latest US Non-Farm Payrolls report, meanwhile, which undermined the case for the Fed to raise interest rates sooner rather than later. With the US labour market failing to tighten as expected the US Dollar softened, bolstering commodity-correlated and higher-yielding currencies such as the ‘Aussie’.
However, at the start of the new week the GBP AUD exchange rate returned to an uptrend. While the Australian Services PMI proved disappointing and fell below the neutral baseline of 50 the UK measure demonstrated further bullishness. As the service sector accounts for more than three quarters of the UK’s economic activity this was considered to be the most important of the three PMIs, prompting another surge in demand for the Pound when it bettered forecast.
RBA Forecast to Remain on Hold in September
The Australian Dollar could find some extra support in the wake of the latest Reserve Bank of Australia (RBA) interest rate decision. Markets do not anticipate any particular shift in policy at this juncture, although the tone expressed in policymaker commentary is likely to decide the direction of the antipodean currency. If policymakers prove more dovish on the outlook of the domestic economy then the GBP AUD exchange rate is expected to extend its recent gains. Lower odds of a near-term interest rate cut, on the other hand, would encourage greater demand for the ‘Aussie’.
Sentiment towards the Pound could remain bullish if other post-referendum data continues to point to greater economic robustness. If July’s Industrial and Manufacturing Production figures show an increase in output then the bias for Sterling is expected to remain to the upside, particularly if the NIESR GDP estimate also proves encouraging. Even so, stronger domestic data may not be enough to keep the GBP AUD exchange rate on an uptrend as higher levels are likely to encourage further profit taking.