GBP/AUD Exchange Rate Stuck Below Opening Levels; Australian Dollar Strong despite Enormous US Employment Growth

Update: GBP/AUD Exchange Rate Remains Trapped below Opening Levels as Australian Dollar Continues to Hold Marginal Gains

A surge in US employment during February has failed to weaken the Australian Dollar this afternoon, leaving the GBP/AUD exchange rate marginally below opening levels.

Trade war fears continue to dampen appetite for the US Dollar, even though the non-farm payrolls report just released has revealed a whopping 313,000 increase in the labour force, compared to expectations for a 205,000 increase.

GBP/AUD Exchange Rate Slips below Opening Levels, Even as Chinese Producer Price Data Weighs on Australian Dollar

US Dollar caution ahead of today’s labour market figures has seen the GBP/AUD exchange rate stuck below opening levels, with appetite for Pound Sterling further softened by a run of poor UK industry and construction reports.

Industrial production grew 1.3% month on month 1.6% year-on-year; better than the respective decline of -1.3% and stagnation seen in December, but worse than forecasts for 1.5% monthly growth and 1.8% annualised growth.

Manufacturing production slowed further than expected on the month, weakening from 0.3% to 0.1%, while year-on-year production rose from 1.4% to 2.7%, just missing out on the forecast 2.8%.

The most extreme departure from forecasts was seen in the construction output figures, which showed a -3.4% month on month drop compared to forecasts for -0.5%, and a -3.9% year-on-year drop, against forecasts for a fall of -1%.

Ole Black, an Office for National Statistics (ONS) Senior Statistician said;

‘Construction continues to be a weak spot in the UK economy with a big drop in commercial developments, along with a slowdown in house building after its very strong end to last year.’

However, trade data was largely positive, with the UK posting a smaller-than-expected deficit of £-3 billion, compared to forecasts for a £-3.8 billion shortfall, after December’s reading was slashed from £-4.8 billion to £-2.4 billion.

GBP/AUD Exchange Rate Weakens as Australian Dollar Benefits from USD Caution ahead of Non-Farm Payrolls Report

The latest Chinese inflation data has failed to undermine the GBP/AUD exchange rate, even though a slowdown in producer price growth may be sending warning signals over the trajectory of the economy.

Chinese consumer prices grew 2.9% year-on-year during February, which represents not only a sharp uptick on the 1.5% annualised figure recorded in January, but also significant rise over the forecast 2.4%.

Much of this strong uptick is seasonal, with the research team at Nomura explaining:

‘The strong rise in CPI year-on-year change is mainly due to a base effect caused by calendar effects (the lunar new year holidays falling in late January last year but mid-February this year).’

The researchers also warned the marginally worse-than-expected drop in the producer price index was a concerning sign, stating:

‘In contrast with solid trade growth in January-February, the continued moderation in PPI inflation signals weakness in growth momentum. We believe domestic demand will be weighed on by a cooling property market, tighter financial conditions, and continued reforms that may well cause some short-term pain to the real economy.’

While this could suggest weakening demand for Australian exports over the coming months, the Australian Dollar has been supported by market focus on the approaching US non-farm payrolls report, which is keeping the US Dollar weak and therefore creating space for high-risk assets to advance.

GBP/AUD Forecast to Advance if Strong US Labour Data Pushes Australian Dollar Lower

There is no economic data left for release from the UK or Australia, but international developments could lift the GBP/AUD exchange rate out of negative territory later today.

The US non-farm payrolls report is one of, if not the most, influential releases in terms of guiding US monetary policy, as a strong labour market boosts wages and therefore inflation, which needs to be kept under control by interest rate hikes.

Forecasts are for a solid reading for February, meaning the US Dollar could advance as markets price in higher odds of monetary tightening over the coming months, which would pressure the Australian Dollar lower.

This would allow the Pound Sterling to Australian Dollar to advance, even though this morning’s weak data and ongoing concerns over the Brexit outlook continue to make traders jittery.

Labour market data from Canada could also weigh on the Australian Dollar this afternoon; forecasts for strong jobs growth may make the ‘Loonie’ a more appealing high-risk asset than the Australian Dollar, sapping demand for AUD.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons