There was nothing surprising about last week’s Reserve Bank of Australia (RBA) meeting minutes, with the tone largely in line with market expectations. The RBA’s generally neutral outlook on monetary policy offered some encouragement to investors, limiting speculation that the central bank could return to an easing bias in the near future. While concerns over the heat of the domestic housing market remained, this did little to dent the ‘Aussie’.
Greater volatility for the GBP AUD exchange rate came in the form of April’s UK consumer price index, which was found to have accelerated further than forecast. As inflation jumped from 2.3% to 2.7% on the year the mood towards the Pound soured, with the sharp uptick boding ill for the health of the wider economy. With rising inflationary pressure already outpacing wage growth, the outlook for UK consumers was not positive, potentially pointing towards a further slowing in domestic economic momentum as households reign in spending.
Unexpected Dip in Australian Unemployment Boosted ‘Aussie’
The GBP AUD exchange rate slumped sharply on Thursday morning as the latest raft of Australian labour market data significantly bettered expectations. April’s unemployment rate unexpectedly dipped from 5.9% to 5.7%, signalling a further expansion of the domestic workforce. This upside surprise encouraged investors to pile back into the ‘Aussie’, even as general market risk appetite remained limited thanks to political developments in the US. Although this improvement was largely fuelled by an increase in part time employment, this was not enough to hamper the antipodean currency.
However, the Pound soon found a rallying point as April’s retail sales figures proved unexpectedly strong. As sales rose 4.5% on the year this indicated that consumer spending has remained resilient, in spite of ongoing Brexit uncertainty and the start of the drop in real wages. While this continued consumer confidence is unlikely to last as inflation continues to rise over the coming months, this still encouraged the GBP AUD exchange rate to return to an uptrend ahead of the weekend.
Higher Government Borrowing Could Dent GBP AUD
Demand for Sterling weakened on Monday morning as the latest opinion polls showed that the Conservatives’ lead has narrowed to just nine points. While Theresa May still appears to remain on course for a solid victory, markets were prompted to revise their odds for a significantly increased Tory majority. With the matter of Brexit continuing to hang over the domestic outlook this gave investors little particular cause for confidence in the Pound.
April’s public sector net borrowing figure is not expected to offer GBP exchange rates any particular support, with forecasts pointing towards a fresh uptick in government debt. Any signs of a widening deficit are likely to discourage investors given the amount of uncertainty that still surrounds the country’s future trade relationships. On the other hand, if there is a more limited uptick in borrowing on the month the mood towards the Pound could improve.
Wider market sentiment is likely to remain the major influence on the Australian Dollar this week, given the rather limited amount of fresh Australian data available. Even so, the ‘Aussie’ could find some additional support if the Westpac leading index shows an improvement on the month. Further signs of solid growth in the domestic economy could encourage greater confidence amongst RBA policymakers, giving investors further reason to favour the antipodean currency.