Market risk appetite has been negatively impacted by the relative strength of the US Dollar in recent days, despite ongoing worries over the outcome of the US presidential election. Stronger-than-expected Durable Goods Orders for August and a continued improvement in jobless claims figures encouraged bets that the Federal Reserve could be inclined to raise interest rates sooner rather than later. As the commodities on which Australia’s economy remains largely based are priced in US Dollars, this strength naturally diminished the appeal of the ‘Aussie’.
However, the Pound to Australian Dollar exchange rate was only able to benefit from this weakness for a little while ahead of the weekend. This was due to the disappointment stemming from August’s UK mortgage approvals weakening further than forecast, implying that confidence amongst lenders and consumers was more limited than hoped. Markets were also discouraged by a sharp increase in the M4 Money Supply on the year, something which points towards rising inflationary pressure within the UK economy.
Unveiled Brexit Timeline Weighed Heavily on GBP AUD Exchange Rate
Confidence in the Pound plunged dramatically on Monday following Prime Minister Theresa May’s stated intention to trigger Article 50 and formal exit proceedings from the EU before the end of March 2017. Markets did not react positively to this news, particularly as comments from other ministers appear to point towards a greater willingness to sacrifice the UK’s access to the single market in negotiations. As a result Sterling was prompted to slide across the board, with the pessimism of investors pushing the GBP AUD exchange rate to a fresh three-year low of 1.6616.
Demand for the ‘Aussie’ strengthened, meanwhile, in the wake of the Reserve Bank of Australia’s (RBA) October policy meeting. Policymakers opted to leave interest rates on hold once again, as well as maintaining a generally less dovish tone with regards to monetary policy. This encouraged bets that the RBA will remain on hold for longer, assuming that more of an easing bias is not apparent in the corresponding meeting minutes. Thus, even though risk appetite remained generally limited the Australian Dollar was able to continue trending higher against the Pound.
AUD Volatility Expected on US Labour Market Data
The antipodean currency is likely to remain in favour with investors in the near future, with expectations optimistic for the latest retail sales and trade balance data. Markets are anticipating a modest pickup in retail sales, evidence of greater consumer confidence and a narrowing of Australia’s trade deficit. Positive results here would give the ‘Aussie’ a further boost, backing up the RBA’s more relaxed outlook on the economy.
A rallying point for the GBP AUD exchange rate could come on the back of September’s UK Services PMI, although the measure is forecast to have weakened slightly on the month. Should the PMI surprise to the upside, in line with the manufacturing and construction measures, then Sterling could be bolstered by the robustness of the domestic economy. Continued strength within the service sector would bode well, given that the sector accounts for more than three quarters of the UK’s economic activity.
Nevertheless, the pessimistic mood of markets with regards to the Brexit issue could maintain pressure on the Pound over the coming week. If investors fail to find a silver-lining in the prospect of the UK’s departure from the EU then the GBP AUD exchange rate is likely to remain on a weaker trend.
Increased volatility for the Australian Dollar is expected on Friday with the release of the US Non-Farm Payrolls report for September. If the labour market continues to demonstrate signs of tightness then the odds of the Fed raising interest rates imminently are expected to increase. Higher bets on a December rate hike would dent the appeal of the ‘Aussie’. On the other hand, a weaker showing could boost risk appetite and weigh down the GBP AUD exchange rate by extension.