UK-EU Talks Stalemate Causes GBP/AUD Exchange Rate Fall
The Pound (GBP) has dropped against the Australian Dollar (AUD) and a range of other currencies today on news that the UK will likely not be able to agree on an exit strategy with the EU ahead of the deadline.
This presents traders with the likelihood that Britain could face a no-deal Brexit – seen to be the most damaging of a range of scenarios.
With Prime Minister Theresa May rejecting the EU’s proposed ‘backstop’ plan, which would see the UK split and Northern Ireland remaining in an EU customs union, the Pound fell sharply against the Australian Dollar.
The pairing was down some 0.4% at the time of writing.
Theresa May will address the House of Commons at 15:30 UK time to give an update on the situation.
Markets Await Tonight’s RBA Minutes as Australian Dollar (AUD) Pessimism Remains Elevated
Offering some upside potential to the GBP/AUD pairing is some market anticipation of the notes from the Reserve Bank of Australia’s (RBA) latest meeting.
RBA board member Ian Harper has gone on record saying that, despite the recent weakness in the Australian Dollar the fundamentals of the economy are strong, although soft wage growth and falling house prices remain a concern.
In a comment that is likely to further dampen AUD sentiment, Mr Harper told investors not to expect any near-term interest rate increases, especially with household debt remaining at a worrying level, saying:
“The best contribution the bank can make at this juncture is to do what they are doing, which is just to sit and make it quite clear what the logic is, and give a sense of where the economy is headed.”
Focus on UK Jobs Market Data to Drive GBP/AUD Exchange Rate
GBP/AUD could head lower again tomorrow when the latest raft of UK employment data is released.
If the average weekly earnings figures come in below expectations we could see the Pound Sterling to Australian Dollar exchange rate dip further.
There is a chance the tide could turn in the Pound’s favour later on Wednesday if the day’s EU summit on Brexit brings signs of a breakthrough in negotiations.
However, as long as the issue of the Irish border and the configuration of a customs union remains unresolved GBP exchange rates look set to struggle in the first half of this week.
Easing UK Inflation could Limit Pound Sterling (GBP) Demand
While Brexit is likely to dominate the headlines this week, the Pound may come under additional pressure on Wednesday when September’s UK consumer price index (CPI) data is released.
Current expectations are for a weakening in inflationary pressure, which could be indicative of a slowing economy.
Even if the headline annual CPI comes in above the Bank of England’s (BoE) 2% target, any slowdown would likely weaken the GBP/AUD exchange rate.
Furthermore, a decline in the rate of inflation would give the BoE more cause for caution, reducing the odds of tighter monetary policy in the short term.