Signs were not favourable for the UK consumer as the latest consumer price index report showed a continued increase in inflationary pressures. Coupled with the fact that real wages were confirmed to have struggled in February, with earnings growth outpaced by rising inflation, this suggested that a squeeze on domestic spending is imminent. With the Bank of England (BoE) still considered unlikely to begin tightening monetary policy for some time to come, this was not a positive sign for the economy and eroded some of the support for the Pound.
March’s Australian labour market data offered a positive surprise, with the number of people in full time employment surging by 74,500. This continued shift away from part-time employment (and the accompanying uptick in the participation rate) offered a more robust picture of the domestic economy. Although the jobs report is notoriously volatile this still encouraged investors to pile back into the ‘Aussie’, easing concerns that the Reserve Bank of Australia (RBA) could take a more dovish policy outlook.
AUD Demand Muted by Dovish RBA Minutes
Confidence in the Australian Dollar weakened once again in response to the RBA’s April meeting minutes, which underlined concerns surrounding the domestic housing market. Policymakers expressed fresh worries over persistently rising house prices, reasserting the more dovish current outlook of the central bank. While an interest rate cut still seems unlikely in the near future, the GBP AUD exchange rate was prompted to trend higher – particularly as risk appetite remained limited.
The Pound saw some pronounced volatility on Tuesday as markets were caught off-guard by Theresa May’s decision to call a snap general election. In spite of previous statements to the contrary, the Prime Minister announced that she was seeking a fresh vote on 8th June in the hopes of boosting her majority within the Commons. While the prospect of renewed political uncertainty initially weighed on Sterling, it ultimately wasn’t long before the GBP AUD exchange rate returned to an uptrend.
Politics to Dominate GBP AUD Outlook
With Brexit preparations set to take a temporary backseat to the election campaign the Pound may struggle to maintain a stronger footing in the coming weeks. Given that consumer confidence has already shown signs of faltering, any increased sense of turmoil and uncertainty is likely to weigh more heavily on the domestic economy. If March’s UK retail sales figures prove disappointing then the GBP AUD exchange rate is expected to slump, with household finances set to see increasing pressure over the course of the year.
Any further deterioration in global sentiment could limit the potential of the antipodean currency, meanwhile, as tensions encourage investors to sell out of higher-risk assets. Worries over North Korea and US-Russia relations may help support the GBP AUD exchange rate, preventing the ‘Aussie’ from capitalising on any Pound weakness.
If the Westpac leading index shows a recovery from February’s -0.1% contraction the mood towards the Australian Dollar could improve. Evidence that the domestic economy is in a stronger state should limit the case for the RBA to maintain its dovish-to-neutral policy outlook. Greater levels of economic activity would bode well for the ‘Aussie’, especially if commodity prices prove resilient.