GBP/AUD Exchange Rate Struggles to Remain Above Opening Levels after Service Sector Growth Slows Significantly

Growing Market Confidence Sees Australian Dollar Overlooked In Favour Of Higher-Yielding Stocks, but UK Service Sector PMI Disappointment Softens GBP/AUD Exchange Rate

A sharper-than-expected decline in the UK services and composite PMIs for March has seen the GBP/AUD exchange rate struggling to remain above opening levels versus the Australian Dollar.

The services index fell from 54.5 to 51.7, while the composite index dropped from 54.2 to 52.1; the indices had been expected to weaken to 54 and 53.9 respectively.

Like yesterday’s worse-than-expected construction index, the performance of today’s data is partly linked to the severe snow storms that caused notable disruptions and delays across the UK during March.

Overall the index shows that the UK service sector saw the weakest rise in activity for 20 months, with Chief Business Economist at IHS Markit Chris Williamson commenting:

‘The UK economy iced up in March, suffering the weakest increase in business activity since the Brexit vote amid widespread disruptions caused by some of the heaviest snowfall in years. As a result, first quarter economic growth will likely have been adversely affected. The PMI surveys collectively signal a quarterly GDP growth rate of just under 0.3%, down from 0.4% in the fourth quarter, albeit with the rate of growth sliding to just 0.15% in March alone.’

Softening Fears of Global Trade War Boost Stock Markets Instead of Australian Dollar, Allowing GBP/AUD Exchange Rate to Remain Positive

In yet another sharp twist on the continuing rollercoaster that is the developing trade dispute between the US and China, fears of a trade war have been softened today after officials from both nations met yesterday to discuss other ways to resolve their differences, which saw the GBP/AUD exchange rate climb despite resurrecting market risk appetite.

Chinese ambassador in Washington Cui Tiankai met with acting Secretary of State John Sullivan yesterday, in a meeting which saw the former ask for the US to ‘resolve relevant disagreements with China through dialogue and consultation’.

Additionally, Larry Kudlow, chief economic adviser to President Donald Trump, commented yesterday that ‘these are just the first proposals … I doubt if there’ll be any concrete actions for several months’.

All this has seen a strong recovery in market hopes that a trade war can still be avoided but, while increased market confidence usually benefits the Australian Dollar, AUD is today being largely overlooked as investors rush into stocks, which offer the potential for a higher yield than the commodity-correlated ‘Aussie’.

Smaller odds of a trade dispute with China also removes some of the downside risks for the US economy, which has had the effect of renewing confidence in the US Dollar, despite its safe-haven nature making it usually unappealing in times of strong risk appetite.

All this has meant that the Australian Dollar has been unable to benefit from the latest trade balance figures released early this morning, which showed that the surplus narrowed less than expected, falling from a downwardly-revised AU$952 million to AU$825 million, leaving the surplus a full AU$100 million higher than economists had predicted.

GBP/AUD Exchange Rate Forecast to Weaken if Markets Keep Selling Pound on Service Sector Data

There is no data left for release from either the UK or Australia for the rest the day, leaving global market conditions and this morning’s UK services and composite indices to drive GBP/AUD exchange rate movement.

This afternoon’s US economic data is unlikely to have a significant impact upon the Australian Dollar, unless the February trade balance figure shows a strong widening deficit; this could spur US President Donald Trump on to further acts of protectionism and therefore elevate the odds of a trade war.

Meanwhile, global appetite for stocks is likely to leave the Australian Dollar somewhat overlooked for the remainder of today’s session, which could see AUD falling further as capital flows into equities, which hold potential for a higher return on investment than the Australian Dollar.

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