Pound Sterling to Australian Dollar Forecast: GBP/AUD Exchange Rate Dips on Backlash from Cabinet Reshuffle

Update: Education Secretary Quits after Cabinet Reshuffle, Pound Sterling to Australian Dollar Exchange Rate Slips

The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate declined on Tuesday as Prime Minister Theresa May’s Cabinet reshuffle had unexpected consequences.

Initially, the Cabinet shift around had little impact on the Pound as all the major players (Chancellor of the Exchequer, Brexit Secretary, Foreign Secretary etc.) retained their positions, alleviating concerns that the changes would highlight the fragility in Theresa May’s government.

However, by Tuesday, Education Secretary Justine Greening had quit after refusing her new position.

As Greening was pro-remain, her loss unsettled Sterling.

Varying PMI Figures Prompt Pound Australian Dollar Exchange Rate Fluctuations

The GBP/AUD exchange rate initially raced higher at the start of last week’s session during thin trading following the Christmas period.

However, Sterling struggled to stabilise following a slew of mixed PMI data from the UK last week, with most sectors of the UK economy voicing concerns over future growth in 2018.

Meanwhile Australia also published its own PMI figures last week, with a gloomy retail reading pressuring the Australian Dollar in mid-week trade.

Some further weakness in AUD was also driven by the release of Australia’s latest trade balance figures at the tail end of the week, as the nation recorded a deficit of –AU$0.62bn against forecasts for a AU$0.55bn surplus.

Australian Dollar Exchange Rates Slip Following Sharp Drop in Construction Activity

Australian Dollar exchange rates were on the back foot at the start of this week’s session as data released overnight reported a sharp slowing in Australia’s construction sector last month.

According to data compiled by the Australian Industry Group (Ai Group) the domestic construction index plummeted from 57.5 to 52.8 in December, falling well below the more modest decline to 56 that had been forecast and reaching an eight-month low.

Analysts at AI group attributed the decline to a slowdown in the engineering and housing subsectors, which offset a rise in activity in apartment construction.

A note from AI group read; ‘Across industry sub-sectors, engineering construction and house building remained the strongest performing areas of construction activity in December. However, the pace of activity growth in both sectors was well down on the solid increases recorded in November.’

Economists also suggest that the slowing of Australia’s construction sector is also expected to persist into early 2018.

This is unlikely to please investors, as it may lead to another jump in house prices and dent the chances for a rate hike from the Reserve Bank of Australia (RBA), as the central bank remains concerned about the property market overheating.

Pound Sterling’s Gains Trimmed by Decline in House Price Index

The Pound found its attempts to exploit the weakness in the Australian Dollar hindered somewhat this morning as GBP investors reacted to the UK’s latest House Price Index.

Figures published by Halifax Bank revealed that house price growth fell from a downwardly revised 0.3% to -0.6% at the end of 2017, disappointing investors who had forecast a more robust reading of 0.2%.

The data also revealed that year-on-year price growth slowed from 3.9% to 2.7% in 2017, with analysts blaming a fall in real wages and economic uncertainty for the decline.

Russell Galley, Managing Director at Halifax Community Bank said;

‘As we’d anticipated, the housing market in 2017 followed a similar pattern to the previous year. This has been driven by a squeeze on real wage growth and continuing uncertainty over the economy.’

GBP/AUD Exchange Rate Forecast: UK Trade Deficit to Widen?

Looking ahead, the GBP/AUD exchange rate may retreat later in the week with the publication of the UK’s latest trade and production figures.

Economists forecast that industrial production will have risen in November, however any gains from this are likely to be offset by a forecast widening of the national trade deficit over the same period.

Meanwhile, Australian Dollar (AUD) exchange rates may be lifted overnight on Tuesday as Australia’s latest Business Confidence figures are expected to report a strong uptick in sentiment in December.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon