GBP AUD Fails to Benefit from Escalating North Korean Tensions
Although growth in the UK economy was confirmed to have picked up to 0.3% in the second quarter this failed to particularly bolster the GBP AUD exchange rate. The underlying details of the gross domestic report were less than encouraging, with business investment found to have stagnated as consumer spending continued to weaken. Altogether this did not paint the most optimistic picture of the domestic outlook, preventing the Pound from making any particularly strong gains against the Australian Dollar.
Markets were ultimately disappointed by Federal Reserve Chair Janet Yellen’s speech at the Jackson Hole economic symposium. As Yellen failed to make any particular hawkish comments on monetary policy the odds of the Fed raising interest rates in December failed to pick up, encouraging investors to pile out of the US Dollar. This offered a solid boost to the commodity-correlated ‘Aussie’, shoring up the general sense of market risk appetite ahead of the weekend.
Brexit Worries Kept GBP AUD on Weaker Footing
Risk sentiment soon soured, however, as geopolitical tensions surrounding North Korea showed fresh signs of escalation. Markets were shaken in the wake of a North Korean missile being launched over Japan, shattering any impression that the situation had cooled in recent days. Fears over the potential for further deterioration in relations between the US and North Korea and the threat of an armed conflict naturally weighed down the Australian Dollar as safe-haven demand strengthened.
This was not enough to boost the GBP AUD exchange rate, though, as worries over Brexit also intensified. With the UK and EU delegations returning to the negotiating table this week markets remained sceptical of the likelihood of any particular breakthroughs, as the two sides remain at odds on the subject of the UK’s exit bill and the sequencing of talks. Given that time is already progressing rapidly towards the 2019 deadline the prospect of the UK exiting the EU without any new deal in place remains, limiting the appeal of the Pound.
Faltering Housing Market May Dent AUD Outlook
Confidence in the Australian Dollar could be further dented if July’s building approvals data demonstrates a sharp slump. Signs that the housing market is continuing to slow are unlikely to improve the appeal of AUD exchange rates, underlining market concerns over the health of the Australian economy. Any contraction in approvals is unlikely to increase the odds of the Reserve Bank of Australia (RBA) returning to a hawkish bias in the near future, creating further ‘Aussie’ downside.
Demand for the Pound, meanwhile, may pick up if July’s net consumer credit and mortgage approvals figures prove positive. If consumers demonstrate signs of continued resilience this could improve the outlook of the UK economy, given that high levels of consumer activity remain one of its key supports. On the other hand, signs of an increasing reliance on credit could give the Bank of England (BoE) fresh cause for concern. As long as the BoE maintains a dovish view this is likely to keep the GBP AUD exchange rate on the back foot.
Further volatility could result from the release of the latest raft of manufacturing PMIs on Friday, with offer a fresh gauge of the robustness of both the UK and Australian economies. If the UK PMI points towards a continued slowing in the domestic manufacturing sector the Pound is likely to come under renewed pressure. However, the ‘Aussie’ may struggle to capitalise on any fresh Sterling weakness if the Australian data fails to impress or market risk appetite continues to diminish.