Although Reserve Bank of Australia (RBA) Governor Philip Lowe did not take a particularly hawkish tone on monetary policy the ‘Aussie’ still strengthened somewhat in response to his words. Markets were relieved that Lowe did not adopt a more dovish stance, with investors continuing to price in the odds of a 2018 interest rate hike.
With a number of major central banks already looking to be returning to a tightening bias there are hopes that the RBA will be encouraged to follow suit. While the RBA’s mood on the domestic labour market is positive, however, the lack of progress towards the 2% inflation target is likely to limit the push for tighter monetary policy and prevented a bullish run for the Australian Dollar.
However, the GBP AUD exchange rate slumped on Friday as Theresa May’s latest speech on Brexit hit the wires. Even though there was mention of a potential transitional period a general lack of substance and comments regarding the single market prompted the mood towards the Pound to sour dramatically.
Investors are still unconvinced by the Conservative government’s approach to Brexit negotiations, particularly as talks have shown signs of stalling. This prompted ratings agency Moody’s to downgrade the UK from Aa1 to Aa2 on Friday evening, citing concerns over the unclear direction of economic policy and the domestic outlook.
Australian Dollar Softens Amidst Market Risk Aversion
Even so, the GBP AUD exchange rate rallied strongly on Monday morning as the general mood of markets deteriorated. With risk appetite limited in the wake of fresh global political uncertainty, prompted by election results in Germany and New Zealand, the Pound was able to regain some ground against the commodity-correlated ‘Aussie’.
With Australian markets quiet thanks to the local bank holiday there was little in the way of support for the antipodean currency at the start of the week. However, another solid uptick from the ANZ Roy Morgan weekly consumer confidence index could offer AUD exchange rates a boost on Tuesday.
As Australian data will be relatively thin on the ground in the coming days, though, the ‘Aussie’ is unlikely to return to a particularly strong footing. If the odds of a December interest rate from the Federal Reserve continue to mount this could dent demand for the Australian Dollar, particularly if the chances of any RBA action are seen to diminish.
Rising UK Consumer Credit Could Weaken GBP Rates
Friday’s finalised second quarter UK gross domestic product data could provoke some volatility for the GBP AUD exchange rate, even though no revisions are expected. Confirmation that the UK economy started to regain some of its momentum in the second quarter could encourage some degree of confidence in the Pound.
On the other hand, if August’s net consumer credit shows a fresh uptick in borrowing this could weigh heavily on Sterling. Given the increasing concern that the Bank of England (BoE) has expressed over the rising reliance on consumer credit a strong showing here could weaken the odds of a 2017 interest rate hike.
Focus will also fall on the latest round of Brexit negotiations, with GBP exchange rates likely to extend their gains if there are any tangible signs of progress. However, if the UK and EU negotiating teams still look no closer to an agreement then the Pound could retreat further from its recent highs.