Update 2: Pound Surges against Australian Dollar as Brexit Transition Terms Agreed
The Pound Australian Dollar (GBP/AUD) exchange rate continues to soar this afternoon following the announcement that the UK and EU had agreed the terms of a Brexit transitional period.
In a move hailed as a ‘decisive step’ in negotiations, the UK and EU have agreed to a post-Brexit transition period that will last from March 2019 to December 2020.
The news provided a major lift in the Sterling exchange rate on hopes that an ‘orderly withdrawal’ will help limit the impact on UK businesses.
However the issue of the Irish Border remains unsolved and work will still need to be done to ensure that this does not derail the agreement.
Update 1: GBP/AUD Strikes 20-Month High as Brexit Optimism Surges
The Pound Australian Dollar (GBP/AUD) exchange rate extended its recent gains even further at the start of this week’s session following suggestions of a Brexit breakthrough.
Reports suggest that Britain’s Brexit secretary David Davis and chief EU negotiator Michel Barnier, will announce that the ‘broad’ terms of a transition agreement have been outlined later today.
The report comes as a major relief to investors as it appears to suggest that British businesses will avoid a ‘cliff edge’ Brexit next year, helping to propel the Pound higher.
However the terms of any agreement will still need to be ratified by EU leaders later this week, at a summit in which Brexit is likely to dominate, something that may have a major impact on the GBP/AUD exchange rate.
Concerns over US Trade Policy Prompt Surge in GBP/AUD Exchange Rate
The Pound to Australian Dollar (GBP/AUD) exchange rate rocketed higher last week, although a quiet data calendar meant most of these gains were driven by external factors.
Chancellor, Philip Hammond’s upbeat growth forecast in his Spring Statement provided only fleeting gains for Sterling on Tuesday, leaving GBP vulnerable to the whims of markets for the rest of the session.
Fortunately for the Pound however the Australian Dollar struggled last week amid a broad based sell-off of commodity-correlated currencies.
While an uptick in consumer confidence helped the ‘Aussie’ recoup some of its early losses, AUD suffered in the latter half of the week as rising trade tensions prompted a fall in market risk appetite.
Australian Dollar (AUD) Plunges as Iron Ore Futures Nosedive
The Australia Dollar remains on the back foot at the start of this week’s session as a sharp fall in Chinese iron ore futures weighs heavily on the currency.
Following a fall in benchmark iron ore prices on Friday the key Australian export looks set to suffer more losses this week as Chinese Dalian futures fell to their lowest levels since November.
The latest fall appears to be driven by record high iron ore inventories in Chinese ports, coupled with further steel production limits imposed by Chinese officials.
Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank said:
‘Iron ore prices [are falling] on physical demand concerns after Chinese policymakers told steel mills in the Wu’an area of the Hebei province to halt production until March 31.’
Further compounding the Australian Dollar’s losses at the start of this week’s session is the continued lack of market risk appetite.
An expected rate hike from the Federal Reserve on Wednesday has the majority of investors shunning riskier assets this week as they take positions in the US Dollar (USD).
Pound (GBP) Lifted by Brexit Optimism
At the same time the Pound is pushing higher this morning on hopes that the UK and EU will be able to reach an agreement on a Brexit transition deal.
The UK’s Brexit secretary David Davis is meeting with the EU’s chief negotiator Michel Barnier at the start of this week ahead of a key EU summit on Thursday.
Markets appear optimistic on the chances of the meeting providing some progress as both sides have signalled they wish to see a deal finalised before the summit.
However some observers suggest that there are a few issues, such as the Irish border, that could still derail talks; something that would likely prove disastrous for the GBP exchange rate.
GBP/AUD Forecast: UK Inflation to Lift Sterling?
Looking ahead the GBP/AUD exchange rate is likely to see some more significant movement on Tuesday as the UK publishes its latest Consumer Price Index (CPI).
Economists expect the CPI figures will reveal that UK inflation slid to 2.8% in February, reaching its lowest levels since July.
This may prompt a rise in the Pound exchange rate, if markets believe that the reduced price pressure may translate into increased consumer spending in the coming months.
Meanwhile the focus for AUD investors this week will likely be on Australia’s latest labour report, with the ‘Aussie’ poised to tumble if wage growth remained subdued last month, as is expected.