As the US non-farm payrolls report proved weaker than expected this helped to boost the Australian Dollar ahead of the weekend.
With the US labour market failing to demonstrate further signs of tightening the chances of the Federal Reserve raising interest rates again before the end of the year diminished.
This improved the appeal of higher-yielding currencies such as the ‘Aussie’, especially as August’s Australian manufacturing PMI showed a sharp uptick on the month.
GBP AUD Shored up by Disappointing Australian Inflation Estimate
Investors were disappointed to find that the TD Securities inflation estimate had eased slightly on the year in August, dipping from 2.7% to 2.6%.
This suggests that the Reserve Bank of Australia (RBA) is unlikely to come under significant pressure to alter its stance on monetary policy in the near future, instead remaining on a neutral policy bias.
Coupled with the latest escalation in tensions between the US and North Korea this left the Australian Dollar with little in the way of support at the start of the week, benefitting the GBP AUD exchange rate.
Even so, the mood towards the Pound soured in the wake of the August’s UK construction PMI. Contrary to expectations the index eased from 51.9 to 51.1 as the sector recorded its lowest month of growth in the last year. As this brings the PMI closer to stagnation territory this naturally prompted some fresh jitters for Sterling.
However, as the construction sector only accounts for a small percentage of the UK gross domestic product the negative impact of this disappointment was somewhat limited.
Stronger UK Services PMI Could Prompt Pound Rally
Increased volatility is likely for the GBP AUD exchange rate on the back of August’s UK services PMI, though, given that the sector remains the primary driver of UK growth.
A downside disappointment here could weigh heavily on the Pound, indicating that the economy is not weathering the uncertainty of Brexit as well as markets have hoped.
On the other hand, if the sector is found to have expanded strongly on the month this could give investors fresh cause for confidence in Sterling.
Domestic political developments could also have a detrimental impact on GBP exchange rates in the coming days, with MPs having returned from their summer recess.
If the government does not show signs of softening its stance on key Brexit issues, or at least demonstrates some tangible progress on the subject, this is likely to further erode support for the Pound. Even though there is now some time before the next round of formal negotiations with the EU commence this is unlikely to put much of a floor under Sterling at this juncture.
No real change is expected from the Reserve Bank of Australia’s (RBA) September policy meeting, limiting the potential for any ‘Aussie’ rally.
However, if policymakers offer any fresh commentary on the domestic outlook this could still dent AUD exchange rates. As long as the central bank looks set to sit tight markets are unlikely to particularly favour the antipodean currency, especially if the general sense of market risk appetite fails to pick up.
A rallying point could be in store for the Australian Dollar, though, if the second quarter Australian gross domestic product data proves positive.
Forecasts point towards a solid uptick in growth on the quarter, which could return the GBP AUD exchange rate to a more sustained downtrend. Signs of a more robust domestic economy are likely to improve the appeal of the ‘Aussie’, at least in the short term.