UK government borrowing figures have helped push the Pound Australian Dollar exchange rate 0.7% higher to 1.70 today.
UK General Election Surprise and RBA Dovishness Push GBP AUD to 15-Week High
UK Prime Minister Theresa May took markets by surprise last Tuesday after announcing there would be a snap general election on June 8th. Markets quickly decided this was a good thing and rushed to buy Sterling on the belief the Conservatives would return to government with a stronger majority – meaning a likelihood of more soft-Brexiters or pro-Remain Tory MPs to support Theresa May against the hardliners pushing for comprehensive divorce from the EU.
Gains against the Australian Dollar were heightened during the week by a continued sell-off following a surprisingly-cautious set of minutes from the Reserve Bank of Australia’s (RBA) April 4th monetary policy meeting.
The board judged that the overheating housing market continued to be a concern, while the labour market had softened recently, leading to weaker household consumption. The minutes stated that ‘developments in the labour and housing markets warranted careful monitoring over coming months’, hinting that interest rates could even be cut lower should key reports disappoint.
GBP AUD gains softened towards the weekend after Friday’s retail sales data showed the biggest monthly decline in sales since 2010. This meant that the beginning of 2017 was the first quarter in which retail sales had declined overall since 2013.
Smallest Government Deficit since Financial Crisis Boosts Pound against Australian Dollar
The UK government deficit has fallen to the lowest level since the financial crisis. Public sector borrowing for the 2016-17 financial year clocked in just marginally above forecasts at -£52 billion, representing a 28% decrease on borrowing in the previous fiscal year.
Although economists warned that the projections for the current financial year are for the deficit to increase to -£58 billion, investors continue to buy into the Pound; the belief that the low borrowing figures will further support the Conservative party in the election is likely helping.
Meanwhile, cooling risk-appetite has further allowed the GBP AUD exchange rate to advance. There is no domestic data to support the ‘Aussie’, but the proximity of key inflation figures tomorrow is keeping investors reticent about taking up new AUD positions in case the report significantly alters the outlook for monetary policy.
GBP AUD Exchange Rate Forecast; AU Consumer Price Data to Alter RBA Policy Outlook?
The UK data calendar falls quiet until Friday, when GDP figures for the first quarter of 2017 are likely to cause a stir. Economists expect the economy to have slowed during the first three months of the year, with quarter-on-quarter GDP projected to fall from 0.7% to 0.4%.
This would be a concerning sign for the UK outlook, as this could be the start of the Brexit-inspired slowdown predicted in response to rocketing inflation and sluggish wages. Should GDP figures defy forecasts and soften by less-than-expected, or not at all, the Pound could surge higher.
Until then it will likely be Australian developments on the data calendar that drive the GBP AUD exchange rate.
The monetary policy outlook is liable to change, given that tomorrow sees both the release of the first-quarter consumer price index and a speech from Reserve Bank of Australia (RBA) Governor Philip Lowe.