Update: Weak Chinese Manufacturing Data and Strong Rate Hike Forecast Fails to Prevent Pound to Australian Dollar Exchange Rate Weakness
Rising concerns over the Irish border after Brexit are continuing to weigh on the Pound to Australian Dollar exchange rate today, despite attempts by Northern Ireland Secretary Karen Bradley to play down the significance of the EU’s draft text.
Bradley has stressed that the text is just an opening position and stated;
‘The British government stands resolutely behind the joint report of December … That means that, as the joint report says very clearly, there will be no hard border.’
Pound to Australian Dollar Exchange Rate Records Losses as AUD Ignores Headwinds from Poor Chinese Data and Strong US Rate Hike Forecast
Numerous developments that should be weighing on the ‘Aussie’ today are having little effect, which has seen the Pound to Australian Dollar exchange rate recording notable losses.
Sterling remains softahead of today’s release of the EU’s first draft of its Brexit withdrawal treaty, with the UK government already preparing to strongly dispute certain aspects of the legal text, which runs to some 120 pages.
One of the key issues is expected to be the Irish border, as leaving the single market would mean that customs checks may be required on goods passing from the Republic of Ireland into Northern Ireland; some have warned, however, that a hard border could threaten the peace process.
This issue has been further complicated today by the leak of a letter from Foreign Secretary Boris Johnson to Prime Minister Theresa May, in which he claimed that he could accept some form of hard border.
The UK government has repeatedly assured that there will be no such thing, with Johnson himself stating to the House of Commons in November that to return to a hard border was ‘unthinkable’ and ‘economic and political madness.’
AUD Bounces Higher as it Ignores Headwinds from Chinese Data and US Rate Hike Forecasts to Push Pound to Australian Dollar Exchange Rate Lower
Despite a number of headwinds that should be weighing heavily on AUD today, the Pound to Australian Dollar exchange rate is recording solid losses, with the ‘Aussie’ strengthening across the board.
For starters, today’s domestic private sector credit data for January showed a weaker-than-expected rate of business borrowing, with credit growth unexpectedly holding at 0.3% month-on-month and rising to 4.9% instead of to 5% year-on-year.
The Chinese manufacturing PMI for February, released shortly afterwards, disappointed forecasts with a sharp slump from 51.3 to 50.3; just 31 basis points above contraction territory.
However, although immediate data may seem disappointing, the Australian Dollar has several long-term factors providing support.
The GBP/AUD exchange rate has recently strengthened again to trend around highs not seen since the beginning of December, so the Australian Dollar has found broad-based support as markets take note of the strong upside potential for the currency.
Additionally, while odds of 87.4% that next month will see an interest rate hike from the Federal Reserve should weigh on AUD, markets have been expecting this for some time so another round of tightening in the States is firmly priced-in.
Further Losses Forecast for Pound to Australian Dollar Exchange Rate if Weak US Data Boosts AUD
The day’s UK economic data has already been released, but there is the potential for arguments over the EU’s draft Brexit text to cause significant flutters for the Pound to Australian Dollar exchange rate as the day continues.
We’re likely to get comments from prominent members of both the Leave and Remain camps as the day progresses, so Pound Sterling could be set to weaken further if it seems that there is much renegotiation to be done over the EU’s text. This would threaten the deadline for agreeing trade and transition terms of October this year.
Meanwhile, the Australian Dollar could strengthen after today’s US GDP figures, which are expected to inch down from 2.6% to 2.5% on an annualised basis during the fourth-quarter.
Although not a seismic shift by any stretch of the imagination, anything that remains around the status quo could be AUD positive, as it will do little to alter the interest rate outlook - an outlook traders have already accounted for – and therefore may not have much of an impact upon the high-risk Australian Dollar.
Tonight’s Australian CBA and AiG manufacturing indices could serve to undermine the Pound to Australian Dollar exchange rate further if they show strengthening sector activity during February.