Investors were discouraged to find that the Australian Consumer Price Index had fallen short of forecasts in the fourth quarter, undermining confidence in the outlook of the domestic economy. As inflationary pressure unexpectedly dipped from 0.7% to 0.5% on the quarter, the appeal of the ‘Aussie’ slumped sharply. The downside disappointment prompted renewed speculation that the Reserve Bank of Australia (RBA) could be prompted to lower interest rates again in the near future; a prospect which is considered bearish for the antipodean currency.
The GBP AUD exchange rate was boosted further by the resilience of the fourth quarter UK Gross Domestic Product data, as the negative impact of the Brexit vote remained minimal. However, the Pound ultimately struggled to hold onto its ensuing rally for long. While growth held up well in the face of the uncertainty following the referendum result, the momentum of the economy remained almost entirely reliant on the service sector and strong consumer spending. With inflation expected to rise further in the coming months and squeeze wages this growth could falter.
Brexit Jitters Weighed on GBP AUD Trading
Confidence in the Pound weakened in anticipation of Parliament’s first debate on the government’s Article 50 bill, which investors are worried could give Theresa May a blank cheque on Brexit. May’s rapid timetable for beginning formal exit proceedings from the EU has weighed on the appeal of Sterling, raising concerns that a harder line of rhetoric will prevail. Nevertheless, with MPs having tabled a number of amendments for the bill, the potential for a Sterling recovery remains in spite of the ongoing atmosphere of uncertainty.
Both the ANZ Roy Morgan weekly consumer confidence index and the monthly NAB business confidence index pointed towards an improvement in domestic sentiment, offering support to the ‘Aussie’ on Tuesday. The weakness of the US Dollar also helped to shore up the ‘Aussie’, with investors favouring the higher-yielding antipodean currency as political unrest in the US mounted.
Widened Australian Trade Surplus to Boost AUD
Risk appetite is likely to remain volatile in the coming week as the fallout from the widely condemned US travel ban and commentary from Donald Trump continue to shift market sentiment. If the new US administration continues to escalate its protectionist rhetoric and policies, the appeal of the commodity-correlated Australian Dollar could weaken given its level of exposure to downturns in the global economy.
Even so, December’s Australian trade balance is forecast to have seen a widening of the surplus from 1.2 billion to 2.0 billion. A wider surplus would boost confidence in the resilience of the domestic economy, despite weakness in other areas, and could see the GBP AUD exchange rate ceding further ground. If January’s Services PMI also offers evidence of solid economic momentum the antipodean currency may hold onto a generally stronger footing ahead of the weekend.
Volatility could be in store for the Pound, meanwhile, with the Bank of England’s (BoE) first policy meeting of the year and its latest inflation report. While no change in monetary policy is expected at this juncture, any change in the BoE’s inflation expectations could encourage speculation of policy being tightened sooner rather than later. However, if Governor Mark Carney continues to emphasise the Bank’s willingness to look through some degree of post-referendum inflation the GBP AUD exchange rate may struggle to make any particular headway.