Markets were not anticipating any policy changes from the Reserve Bank of Australia (RBA) at its November meeting, although that didn’t prevent the Australian Dollar from rallying strongly on the back of this lack of action. Policymakers indicated that their quarterly forecasts were likely to remain unchanged, something that encouraged greater confidence in the outlook of the domestic economy. With the housing market also running at heated levels this suggests that interest rates are likely to remain on hold in the near future, a positive prospect for the antipodean currency.
The Pound saw some marked volatility in response to speculation over the future of Bank of England (BoE) Governor Mark Carney, who had come under fire from Brexiteers in recent weeks. News that Carney would be extending his term until June 2019 offered reassurance to investors, although this was still short of the full eight-year term that many had hoped for. As a result the GBP AUD exchange rate struggled to make any particular gains, instead extending its slump further.
Confidence in the Australian Dollar was driven up by a combination of global market developments, with better-than-expected Chinese PMIs and US Dollar softness increasing the appeal of the higher-yielding currency. Signs that the world’s second largest economy is distancing itself from the possibility of a hard landing offered encouragement to investors. Commodity prices were also boosted by the indication that the Chinese manufacturing sector continued to expand in October, despite the country’s efforts to rebalance.
Underwhelming UK PMIs Weigh on GBP AUD Exchange Rate
October’s UK Manufacturing PMI, however, proved less positive. While the sector remained in a state of solid growth the reading still fell short of forecast, suggesting that some of the momentum has left the domestic economy at the start of the fourth quarter. Also of concern was the sharp increase in producer prices, something which is likely to feed through into the wider economy and drive up the Consumer Price Index.
If the UK Construction and Services PMIs also show a weakening on the month then the GBP AUD exchange rate is likely to come under further pressure. Should the robustness of the domestic economy be called into question then Brexit-based anxiety could be heightened, prompting a fresh round of Pound selling. On the other hand, if the service sector continues to shrug off the uncertainty that has followed the EU referendum then the Pound could find a rallying point.
Even so, the appeal of Sterling is expected to remain muted ahead of the latest BoE policy meeting. While policymakers are unlikely to take any action at this time the tone of the meeting minutes will be heavily scrutinised. If policymakers indicate a greater willingness to cut interest rates to a fresh record low then the GBP AUD exchange rate could fall back towards its recent lows.
AUD Weakness Forecast on Bullish US Payrolls Report
The major influence for the Australian Dollar, meanwhile, will be the evolving odds of a 2016 interest rate hike from the Federal Reserve. Both Wednesday’s Federal Open Market Committee (FOMC) meeting and the latest Non-Farm Payrolls report are set to shift investor confidence, with greater hawkishness having the potential to weigh on the ‘Aussie’. If the US labour market data disappoints, though, the Australian Dollar could capitalise on the weakening of the safe-haven asset.
Also of note will be the Australian Services PMI, which is forecast to have edged back into growth territory in October. A strong showing here would bode well for the health of the Australian economy, further reducing the impetus for the RBA to consider a return to monetary easing. However, if the service sector fails to pick up sufficiently then the GBP AUD exchange rate could stand to benefit.