Pound Australian Dollar (GBP/AUD) Exchange Rate Recovers Ground as Markets Continue to Forecast BoE Rate Hike

Weaker-than-Forecast UK GDP Fails to Keep Pound Australian Dollar (GBP/AUD) Exchange Rate Down

In spite of the disappointing downward revision of the fourth quarter UK gross domestic product (GDP) the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was able to push higher ahead of the weekend.

While the second GDP estimate prompted the Pound (GBP) to trend sharply lower on Thursday, the impact of the data proved to be somewhat short-lived.

Even though growth dipped to just 0.4% on the quarter this was not enough to significantly diminish market hopes of another Bank of England (BoE) interest rate hike.

Although the loss of economic momentum could weigh heavily on the minds of policymakers in the coming months investors remain confident that a rate hike is still on the table for the first half of 2018, given the relative hawkishness of recent policymaker comments.

As a result, and with Brexit-based jitters also easing a little, the GBP/AUD exchange rate was able to regain some ground during trade on Friday.

Australian Dollar (AUD) Struggles to Shrug off Dovish RBA Outlook

With fresh Australian data rather lacking any impetus to drive the currency higher there was little in the way of support for the Australian Dollar (AUD), to the benefit of the GBP/AUD exchange rate.

A lingering sense of market risk aversion in the wake of Wednesday’s hawkish Federal Open Market Committee (FOMC) meeting minutes has kept AUD exchange rates on a generally softer footing.

As the Reserve Bank of Australia (RBA) looks set to leave interest rates on hold for the foreseeable future the prospect of increased policy divergence with the Fed limits the upside potential of the Australian Dollar.

Political jitters have also weighed on AUD exchange rates in recent days, with the scandal surrounding Deputy Prime Minister Barnaby Joyce raising concerns over the resilience of the government and its slim majority.

However, while Joyce announced his decision to resign this has failed to shore up either investor confidence or the Australian Dollar, as the impact on the Turnbull government is unlikely to end here.

Rise in Private Sector Credit Forecast to Boost AUD Exchange Rates

Unless confidence in the outlook of the Australian economy picks up there is likely to be a continuing limit to the downside vulnerability of the GBP/AUD exchange rate.

However, if January’s private sector credit figures beat forecasts and demonstrate an improvement then the Australian Dollar could find a rallying point.

A higher level of credit would signal a greater sense of domestic confidence in the outlook of the Australian economy, potentially paving the way to stronger growth.

While even a bullish showing here is unlikely to be enough to alter the policy bias of the RBA at this stage, this may still be enough to shore up AUD exchange rates in the short-term.

Brexit-Based Uncertainty Limits GBP/AUD Exchange Rate Upside

As the Conservative government remains clearly divided on issues relating to Brexit this could well keep the GBP/AUD exchange rate under a degree of pressure in the coming days.

With the next round of negotiations drawing nearer concerns over the prospect of a hard Brexit are likely to mount, given the significant degree of separation that remains between UK and EU officials.

Mortgage approvals and consumer credit figures will also be in focus next week, which could influence the odds of the BoE raising interest rates again sooner rather than later.

As consumer spending has already shown, signs of moderating any uptick in credit levels could be welcomed, even if it creates vulnerability within the domestic economy.

If signs point towards weaker confidence and disappoint forecasts, though, the GBP/AUD exchange rate may return to a weaker footing.

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