Rising Odds of Further RBA Cuts Rates Boost Pound Sterling to Australian Dollar (GBP/AUD) Exchange Rate

Slowing Australian Economy Drags on Australian Dollar (AUD) Exchange Rates

UPDATE: As the first quarter Australian gross domestic product eased as forecast from 2.3% to 1.8% on the year the Australian Dollar (AUD) trended lower across the board.

Confidence in the outlook of the Australian economy deteriorated further on the back of the data, with markets increasingly betting that the Reserve Bank of Australia (RBA) will cut interest rates to a fresh record low before the end of the year.

The GBP/AUD exchange rate also benefited from a surprise uptick in the UK services PMI, which helped to prevent the composite PMI slipping into a state of contraction in May.

GBP/AUD Exchange Rate Steadies as Markets Brace for Australian GDP

UPDATE: The negative impact of the weaker UK construction sector report faded over the course of the afternoon, limiting the downside potential of the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate.

Slightly more conciliatory comments from Chinese and Mexican officials encouraged an improvement in market sentiment, even though the threat of fresh US trade tariffs remains.

As investors braced for the Australian growth data, though, the Australian Dollar (AUD) struggled to hold onto its earlier uptrend.

Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Fails to Benefit from RBA Interest Rate Cut

As widely anticipated, the Reserve Bank of Australia (RBA) opted to cut interest rates to a fresh record low at its June policy meeting, limiting the appeal of Australian Dollar (AUD) exchange rates.

However, this was not enough to prevent the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate from continuing to shed ground in the face of underwhelming UK data this morning.

Investors had already largely priced the impact of an interest rate cut into the Australian Dollar over the course of the last week, limiting the decision’s impact on AUD exchange rates today.

In spite of the move RBA policymakers maintained a relatively upbeat outlook, suggesting that the central bank could prove reluctant to cut interest rates further in the months ahead.

Construction Sector Contraction Adds to Pound Sterling (GBP) Exchange Rate Weakness

Demand for Pound Sterling (GBP) exchange rates, meanwhile, generally declined on the back of May’s UK construction PMI.

Following on the heels of Monday’s surprisingly weak manufacturing PMI, the construction index slumped from 50.5 to 48.6 as political uncertainty weighed on the sector.

With businesses still taking a cautious view even in the wake of the delayed Brexit deadline the construction sector fell into a state of contraction last month as workloads declined.

All in all, this suggests that the UK economy faces the prospect of a fresh slowdown in the second quarter as the lack of clarity over Brexit limits business confidence and activity.

As Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, commented:

‘Optimism about the strength of the sector’s future was the lowest since October 2018. Policymakers will need to pull a large rabbit out of the hat, and fast, to improve these difficult conditions and prevent a further entrenchment of gloom and contraction this summer.’

Pound (GBP) Exchange Rates Vulnerable Ahead of UK Services PMI

Further weakness could be in store for the Pound to Australian Dollar (GBP/AUD) exchange rate tomorrow if May’s UK services PMI shows a similar deterioration.

While forecasts point towards the index remaining relatively steady on the month at 50.6, the risk of a downside surprise appears higher in the wake of the weaker manufacturing and construction data.

If the service sector also falls into a state of contraction this would significantly raise the risk of the UK economy slowing in the second quarter, leaving Pound Sterling on the back foot against its rivals.

On the other hand, as the sector accounts for more than three quarters of UK economic activity evidence of greater resilience could see GBP exchange rates rally.

Weakening Australian Growth Set to Drag on AUD Exchange Rates

Confidence in the Australian Dollar (AUD), on the other hand, looks set to deteriorate further on the back of tonight’s first quarter Australian gross domestic product data.

With forecasts suggesting that the growth rate eased from 2.3% to 1.8% on the year investors are unlikely to find any fresh incentive to buy into the antipodean currency at this stage.

Unless the GDP report shows an uptick in growth on the quarter concerns over the outlook of the Australian economy are likely to drive Australian Dollar (AUD) exchange rates lower across the board.

Any fresh escalation in global trade tensions could equally weigh on the Australian Dollar, offering the GBP/AUD exchange rate potential support even in the face of ongoing Brexit uncertainty.

Louisa Heath

Contact Louisa Heath


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