Investors were fretting about UK access to the single market last week, while recovering iron ore prices furthered the GBP AUD exchange rate decline.
Pound Undermined by Strong Australian Dollar as Iron Ore Prices Rocket Higher
The GBP AUD exchange rate spent the past week on a strong downtrend, with fears of a ‘Hard Brexit’ weighing on Sterling and the Australian Dollar receiving a boost from buoyant iron ore prices.
The weekend had seen Theresa May suggest that she wasn’t interested in keeping ‘bits’ of EU membership, which was widely taken to signal that a ‘Hard Brexit’ was on the way. In a display of bearishness not alien to Pound traders, Sterling was sold off on fears the UK would quit the single market. That pessimism has only increased this week.
Meanwhile, commodity prices were providing strong support for the Australian Dollar. Iron ore spent much of the week clocking in solid gains, with suggestions that the improved revenue would boost Australia’s economy and indications China will continue to curb excess steel capacity further supporting the ‘Aussie’.
GBP AUD opened last Monday around 1.67 and had fallen to 1.62 by the close of trade on Friday.
GBP AUD Exchange Rates Slump on Predictions Theresa May will Signal ‘Hard Brexit’
The Pound has tumbled today, with GBP AUD slumping to a nine-and-a-half-week low. The latest fall has been triggered by government sources revealing that Theresa May, in her eagerly-awaited speech on Brexit tomorrow, will announce that she intends Britain to quit the single market, the customs union and the European Court of Justice.
While this has caused a huge slump in the Pound, many analysts have been quick to point out that the likelihood of a ‘Hard Brexit’ has been high for some time. Berenberg Senior UK Economist Kallum Pickering observed;
‘While UK Prime Minister Theresa May has previously stated that she doesn’t recognise the concept of a ‘hard Brexit’ the market clearly does. Comments by May hinting at a hard Brexit sent the Pound lower over the weekend. But is any of it new information? No, not really. May has stated on several occasions that she will prioritise regaining control of the UK’s borders and laws over access to the single market.’
While the Australian Dollar is – unsurprisingly – bullish against the Pound, the ‘Aussie’ is in a more mixed position overall, curbing further advances. Domestic data has been encouraging, however. TD Securities uses the Treasury’s modelling to release a monthly update on inflation; the latest readings have shown a month-on-month acceleration from 0.1% to 0.5% and a year-on-year pick up from 1.5% to 1.8%.
Extreme Volatility Forecast for GBP AUD as Brexit Plans Clash with High Profile Data
Tomorrow’s UK consumer price index for December is unlikely to get a look-in, given that Theresa May will be setting out her vision for Brexit. With markets already reacting to the expectation that she will confirm a ‘Hard Brexit’ is on the cards, much of the reality of a ‘Hard Brexit’ may have been priced in to Sterling. However, there is still room for depreciation; the Pound Sterling to Australian Dollar exchange rate is over three cents higher than the lows struck in October after the mysterious ‘flash crash’.
There is a good chance the Pound will return to being a politically-correlated currency in the next few days, ignoring all domestic data, as happened in the first few weeks following the referendum.
For the Australian Dollar, there are plenty of high-impact events – both domestic and foreign – that could rock the currency and stymie further gains against the Pound. These include the US consumer price index on Wednesday, Australian employment change and unemployment rate data on Thursday and Chinese Gross Domestic Product on Friday.