Strongest Australian Economic Forecast in Five Years Confounds GBP/AUD Exchange Rate’s Gains on Wage Data

GBP/AUD Exchange Rate Unable to Make Gains Thanks to Strong Australian Economic Outlook, despite Forecast-beating UK Wage and Jobs Data

Strength elsewhere for the Pound has not extended to the GBP/AUD exchange rate today, which is stuck below opening levels thanks to numerous tailwinds behind the Australian Dollar.

This has left Sterling unable to benefit from solid wage and employment data, even though these above-forecast figures are pushing the Pound to strong gains versus many of its other major peers.

Average weekly earnings grew 2.5% in the three months on the year to November, in line with both forecasts and the performance for the three months year-on-year to October, but earnings excluding bonuses for the same period grew 2.4% – beating forecasts by 10 basis points.

Combined with the recent slowdown in core inflation, this means that the fall in real wages has become less pronounced of late, reducing the squeeze on household budgets and improving the outlook for consumer spending.

The employment change figure for the three months to November proved particularly cheering, as it showed an increase of over 100,000, compared to expectations that the decline of -56,000 seen in the three months to October would have slowed to -10,000.

Forecasts of Strong Growth for Australian Businesses Keeps GBP/AUD Exchange Rate Below Opening Levels

According to a survey of 269 Australian chief executives, the nation’s private sector currently holds the most optimistic economic outlook for the year ahead in five years.

Data collected by the Australian Industry Group (AiG) revealed the highest expectations for growth in investment and employment since 2012 and that over two thirds of the C-suite personnel expected to see increased sales.

While this has seen the Australian Dollar make strong gains versus many of its peers, the data does come with a caveat: it is unlikely that workers will see an uptick in the pace of wage growth over the coming year, which could weigh on the outlook for monetary policy.

Innes Willox, Chief Executive of the AiG, commented;

‘If these positive expectations can be turned into reality we would see strong business investment and spending on training, R&D and technologies reaching post-GFC highs.’

‘And most importantly, we would see a year in which employment growth equalled or even exceeded the record jobs growth experienced in 2017.’

A weak US Dollar is also helping to boost appetite for the Australian Dollar, after White House officials attending the World Economic Forum (WEF) event in Davos were unable to dispel fears regarding the protectionist attitude towards trade held by President Donald Trump’s administration.

Overseas Risks to Australian Dollar Could Allow GBP/AUD Exchange Rate to Make Overnight Gains

There is no UK or Australian data set for release until tomorrow’s British Bankers’ Association (BBA) loans for house purchase figures for December and the Confederation of British Industry (CBI) reported sales figures for January.

However, the global data calendar holds several events that could strengthen or weaken the appeal of the Australian Dollar, thereby creating volatility for the GBP/AUD exchange rate.

This afternoon brings multiple US data releases, including the Markit manufacturing, services and composite PMIs and existing home sales and mortgage applications data.

Some solid performances here might afford the US Dollar some respite from the current weakness it is experiencing, which would undermine the Australian Dollar’s strength.

New Zealand fourth-quarter consumer price index figures are set for release during tonight’s Australasian session; signs of strong price growth could see the markets switching to favour the New Zealand Dollar over the Australian Dollar, which would again create room for the Pound to advance.

Although markets are responding positively to the slight uptick in UK wage growth, economists are already warning that the outlook for worker pay remains gloomy over the coming year.

Suren Thiru, British Chambers of Commerce Head of Economics, explains;

‘While it is encouraging that regular earnings growth picked up slightly, subdued economic conditions are likely to weigh on wage growth over the next year. As a consequence, pay growth is likely to remain stubbornly below price growth over the near term, dampening consumer spending, a key driver of UK GDP growth.’

This could return to weigh on the Pound at a later time as market jubilance over the sizeable increase in employment begins to fade.

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