UK Public Finance Deterioration Drives Pound Australian Dollar Exchange Rate Lower

GBP/AUD Exchange Rate Slips Lower as France Signals High No-Deal Brexit Likelihood

UPDATE: The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate extended its downtrend throughout the afternoon as anxiety over Brexit swelled.

With the French government signalling that it now sees a no-deal scenario as the most likely outcome the mood towards the Pound soured.

As talks between Boris Johnson and key EU leaders appear unlikely to yield any breakthrough on Brexit investors saw little incentive to favour GBP exchange rates.

Weakening UK Public Finances Drag on Pound Australian Dollar (GBP/AUD) Exchange Rate

News that the UK is on track to miss its borrowing targets for the current financial year saw the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate stumble.

As July’s public sector net borrowing data showed a smaller surplus than forecast this stirred up fresh anxiety over the fiscal health of the UK.

Independent economist Sean Richards noted on Twitter:

This deterioration in the public finances exacerbated existing worries over Boris Johnson’s spending pledges, especially with significant funds already earmarked to manage the fallout of Brexit.

With UK borrowing at significant risk of rising further in the months ahead the mood towards Pound Sterling (GBP) naturally soured.

Anticipation ahead of Johnson’s meeting with German Chancellor Angela Merkel also put a dampener on GBP exchange rates this morning.

Australian Dollar (AUD) Benefits from Signs of Strengthening Growth Momentum

A modest uptick in the Westpac leading index offered a boost to the Australian Dollar (AUD), meanwhile.

Returning to positive territory at 0.1%, the index signalled renewed growth momentum at the start of the third quarter, encouraging a sense of economic confidence.

Although tensions between the US and China continued to deteriorate in the face of the Trump administration’s continued belligerence on trade this was not enough to drag down AUD exchange rates.

Speculation that the latest set of Federal Reserve meeting minutes could signal an imminent interest rate cut equally helped to shore up the Australian Dollar as market risk aversion eased.

Negative UK Retail Sales Forecast to Limit GBP/AUD Exchange Rate Support

Selling pressure on the Pound could increase on Thursday with the release of August’s CBI reported retail sales survey.

With the index expected to remain in negative territory at -15, indicating a continued slowdown in sales, this could see the GBP/AUD exchange rate shedding further ground.

Fresh evidence of weakening domestic sentiment may drag the Pound lower across the board as the impact of political uncertainty looks set to persist for the foreseeable future.

However, if consumer spending proves resilient and prompts growth in retail sales this could help GBP exchange rates to stage a temporary rally.

As long as the issue of the Irish backstop remains in the headlines, though, the risk of a no-deal Brexit scenario is likely to limit the potential for Pound Sterling gains.

Disappointing Australian PMIs May Dent AUD Exchange Rates

August’s set of Australian manufacturing and services PMIs could see the Australian Dollar fall out of favour, however.

If the PMIs show a lower level of economic activity this may encourage bets that the Reserve Bank of Australia (RBA) will cut interest rates again in the months ahead.

Even though forecasts point towards both sectors remaining in a state of expansion any signs of slowing momentum could fuel a fresh bout of AUD exchange rate weakness.

Deteriorating market confidence may also drag on the Australian Dollar in the days ahead if global trade tensions continue to escalate.

Louisa Heath

Contact Louisa Heath