Rising Odds of Fed Interest Rate Hike Drag on Australian Dollar (AUD)
UPDATE: A fresh fall in the US unemployment rate left the Australian Dollar (AUD) on a weaker footing this afternoon as markets continue to see higher odds of another Federal Reserve interest rate hike.
With the unemployment rate now at a 49-year low of 3.7% investors expect the Fed to tighten monetary policy further before the end of the year, weakening market risk appetite.
Speculation that the UK and EU are moving closer to a deal on Brexit gave the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate an additional boost today.
Reports that Ireland Will Back UK Border Plan Boost Pound Sterling (GBP) Demand
UPDATE: Investors piled into Pound Sterling (GBP) this afternoon as reports suggested that Ireland is potentially willing to back Theresa May’s customs plan.
The prospect of a resolution to the major stumbling block of the Irish border encouraged the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate to jump 0.7% on the day’s opening level.
While it remains to be seen whether the UK and EU are any closer to a final deal on Brexit the speculation was enough to drive Pound demand for the time being.
Rise in Australian Exports Fails to Prevent Australian Dollar (AUD) Slump
An unexpected widening of the Australian trade surplus in August was not enough to shore up the Australian Dollar (AUD) today as market risk appetite dried up.
Although the Australian economy shook off rising global trade tensions, with exports rebounding 1% on the month, AUD exchange rates extended their downtrend.
While worries over US protectionism have eased in recent days the threat of a prolonged US-China trade spat remains, to the detriment of Australia’s economic outlook.
If global commodity prices continue to weaken this is likely to weigh heavily on Australian exports, denting growth in the third quarter.
The appeal of the Australian Dollar was also limited by the increasing odds of the Federal Reserve raising interest rates once again in December.
Pound Sterling (GBP) Benefits From Easing UK Political Jitters
The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate also benefitted from a temporary easing in UK political jitters.
Theresa May’s closing speech at the Conservative Party conference helped to push Pound Sterling (GBP) higher across the board, in spite of her harder Brexit rhetoric.
Even though May reiterated a willingness to leave the EU without a deal the mood of GBP exchange rates remained positive, with investors welcoming May’s more confident tone.
As rumbles of a potential leadership challenge quieted, for the time being, this encouraged a sense of Pound bullishness.
While UK car sales slumped by a dramatic 20.5% in September this failed to halt the uptrend of the GBP/AUD exchange rate.
Australian Retail Sales Increase May Dent GBP/AUD Exchange Rate Strength
A rallying point could materialise for the Australian Dollar ahead of the weekend however if August’s retail sales data proves positive.
Forecasts point towards a moderate rebound of 0.3% on the month, following on from stagnation in July, which could encourage greater confidence in the domestic outlook.
Even if sales strengthen on the month, AUD exchange rates remain vulnerable to additional downside pressure with the release of the latest US labour market data.
Another dip in the US unemployment rate would offer the Fed a greater incentive to raise interest rates before the end of the year, giving investors fresh reason to sell out of the Australian Dollar.
Any weakening in US wage growth, on the other hand, could bolster AUD exchange rates by undermining the case for Fed hawkishness.
Steady UK Housing Market to Support Pound Sterling (GBP) Exchange Rate Gains
Friday’s Halifax house price index could offer additional support to the GBP/AUD exchange rate, meanwhile.
Evidence that the UK housing market is holding up may give the market greater cause for confidence in the Pound, even though further disruption looks inevitable as Brexit approaches.
A disappointing showing, on the other hand, would leave Sterling vulnerable to selling pressure, with the recent bout of GBP exchange rate strength unlikely to sustain itself over the longer term.
Fresh political developments are also likely to alter the sentiment of the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate, particularly if the odds of a no-deal Brexit continue to increase.