The appeal of the Australian Dollar was boosted by better-than-expected labour market data on Thursday. May’s unemployment rate showed an unexpected dip from 5.7% to 5.5%, pointing towards greater underlying strength in the Australian economy. This stronger showing encouraged hopes that the Reserve Bank of Australia (RBA) will continue to adopt a more positive view on the economy and monetary policy.
Although risk appetite was somewhat dented by a more hawkish Federal Reserve interest rate hike the GBP AUD exchange rate still came under pressure. Despite the notoriously volatile nature of the employment report the mood towards the ‘Aussie’ generally improved in response to the bullish data, overshadowing any particular sense of risk aversion. While other signs from the domestic economy have been less positive this was not enough to hold back the antipodean currency ahead of the weekend.
Unexpectedly Hawkish BoE Boosted GBP
Another surprise was in store for the markets at the Bank of England’s (BoE) June policy meeting, which proved unexpectedly divided. Investors had anticipated a single dissenting vote at this juncture, prompting a sharp uptick for the Pound when three policymakers were found to have voted for an immediate interest rate hike. This encouraged bets that the BoE could return to a tightening bias sooner rather than later, giving the GBP AUD exchange rate a strong rallying point.
However, this bullish mood soon started to fade as the odds of the BoE raising interest rates in the near future remained decidedly slim. Prominent hawk Kristin Forbes is due to depart the Bank at the end of the month, leaving the balance of the Monetary Policy Committee (MPC) leaning still heavier towards the doves. With concerns over the outlook of the UK economy still heightened this left the GBP AUD exchange rate vulnerable to renewed downside pressure.
Brexit Talks Dominate GBP AUD Outlook
As formal Brexit talks finally get under way the mood towards the Pound is likely to remain somewhat muted. Even if relations between the UK and EU officials appear to have thawed somewhat the negotiations still have plenty of potential to become difficult, especially as time pressures start to mount. So long as the Conservative minority government continues to pursue a hard-line course on the matter of Brexit this is likely to limit the upside potential of Sterling.
While a sense of political instability continues to hang over the UK this could keep GBP exchange rates under pressure for some time to come. Even once the Conservatives finalise their confidence and supply arrangement with the Democratic Unionist Party (DUP) the government will remain in a relatively precarious position of power. If the latest UK data also continues to paint a less healthy picture of the economy investors could see little reason to support the Pound.
Markets will be keen to see the details of the RBA’s June meeting minutes, hoping for signs that policymakers are taking a more optimistic view on monetary policy. So long as the minutes lean towards a less dovish tone the Australian Dollar could make renewed gains against the Pound. However, fresh warnings over the state of the domestic housing market could undermine some of the recent strength of the ‘Aussie’.