Speculation over tighter US monetary policy helped the Pound Australian Dollar recover to a high of 1.7721 after slumping last week to a low of 1.7270.
Pound Tailwinds from Services PMI Falter in the Face of Weak Economic Forecasts
Despite an initial spike to 1.7599 after the release of the AiG Performance of Service Index, which crashed from 53.9 to 45.0, the GBP AUD exchange rate weakened at the start of last week’s trading. This was despite bullish performances from both the UK services and composite PMIs, with the former posting unexpected growth and the latter showing greater-than-anticipated expansion. However, as earlier indices had performed similarly well, markets were already expecting this, which curbed the Pound’s gains.
GBP AUD hit a nine-day low of 1.7270 by the middle of Thursday’s London session, responding to mixed production data and gloomy economic forecasts. The British Chambers of Commerce (BCC) cut -0.4% off its GDP forecast for 2016, taking it down to 1.8%, while slashing its growth predictions for 2017 by -1.3% to just 1%.
RBA Optimism Boosts Australian Dollar, Rising Fed Hike Bets Create Headwinds
The Australian Dollar rode high after Tuesday’s Reserve Bank of Australia (RBA) policy meeting. This was despite the fact that GDP figures for the second quarter had disappointed with mixed results, with lower than expected growth on the quarter and a negative revision to Q1 results. A cautiously optimistic central bank kept the Australian Dollar on the uptrend, however. Markets had been expecting a rate freeze, but a close examination of the accompanying policy statement suggested the board held a more upbeat outlook on the Australian economy than previously.
By the end of the week rising hopes of tighter US monetary policy were weighing on the ‘Aussie’, with weak domestic home loans data and sluggish Chinese inflation data helping GBP AUD push even higher. The weight of three hawkish Federal Reserve officials had seen odds of a rate hike before the end of the year climb significantly, weakening the appeal of high-yield assets such as the Australian Dollar.
UK Inflation Data Holds Steady at Near Two-Year High; Pound Australian Dollar Holds Gains
On Tuesday the Pound Australian Dollar exchange rate was clinging to the 0.3% gains recorded at the beginning of the session following the release of UK consumer price data.
Inflation had been expected to accelerate from 0.6% to 0.7% on the year, with an uptick from 1.3% to 1.4% for the core index. Price growth instead held steady at previous levels in August. This has caused some volatility in the GBP AUD exchange rate, with investors unsure how to interpret the data.
On the one hand, the pressure from weaker Pound Sterling has not yet filtered through to the consumer. This could indicate that the Bank of England (BoE) will not be in a hurry to raise interest rates; higher borrowing costs increase the value of a currency and therefore drive inflation lower. This could weaken the outlook for the Pound.
On the other hand, the fact that prices have not moved higher could indicate that inflation will not spiral out of control as a result of the dramatically-weakened Pound. It also alleviates some of the concerns sparked after the BoE cut interest rates, as it was worried this could have exacerbated inflationary pressures and lead to an even larger overshoot of the bank’s 2% target.
Fed Rate Hike Bets Depress Australian Dollar despite Supportive Chinese Industrial Data
Speculation over the Federal Reserve continues to dominate Australian Dollar movement. One would expect the Australian Dollar to be on the decline due to strong appreciation during the Asian session after the recent supportive data. However, expectations of higher US interest rates before the end of the year is providing more support for GBP AUD exchange rates than domestic data can overpower.
The domestic data includes a near four-point rise in consumer confidence and a two-point rise in the NAB business conditions index. Chinese data was also supportive, with industrial production and retail sales rising above forecasts to 6.3% and 10.6% respectively.
In other developments, Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent noted that;
‘If commodity prices were to stabilise around current levels, that would be a marked change from recent years. Also, the end of the fall in mining investment is coming into view. The abatement of those two substantial headwinds suggests that there is a reasonable prospect of sustaining growth in economic activity, which would support a further gradual decline in the unemployment rate. There is also a good prospect that the growth in wages and the rate of inflation will gradually lift over the period ahead.’
But with increased market bets of a US interest rate hike being introduced during the December policy meeting, investors are abandoning commodity-correlated assets like the Australian Dollar, keeping the ‘Aussie’ on a downtrend.
GBP AUD Forecast; Exchange Rate Volatility Predicted after Thursday’s BoE Meeting
Thursday promises significant Pound Australian Dollar exchange rate movement thanks to the presence of key developments on the economic calendar for both the UK and Australia.
Australia leads the way, releasing employment change and unemployment rate figures for August. While the level of joblessness is expected to hold steady at 5.7%, the labour market is expected to have created 15,000 new roles last month.
Later the Bank of England will announce its latest monetary policy decision. No changes are expected to either interest rates or asset purchases, but there is a chance the Monetary Policy Committee (MPC) could signal that further stimulus is likely, despite the recent buoyant PMI releases.
US Advance retail sales are also on the calendar, which may soften the Australian Dollar if they rise as forecast, furthering the case for an interest rate hike.