Pound Australian Dollar (GBP/AUD) Exchange Rate Slides as UK Services PMI Turns Negative

Unexpected UK Service Sector Weakness Fuels Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Decline

A surprise contraction from the UK services PMI saw the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate losing ground this morning.

As forecasts had pointed towards the index narrowly remaining in positive territory the decline from 50.6 to 49.5 put a significant dampener on demand for Pound Sterling (GBP).

Given the major role that the service sector plays in driving the UK economy this unexpectedly weak showing raised concerns over the potential for a third quarter gross domestic product contraction.

With the economy showing signs of a slowdown in the face of the persistent uncertainty surrounding Brexit and the UK’s future relationship with the EU the risk of a sustained decline remains.

Australian Dollar (AUD) Shrugs off Narrowed Trade Surplus

Although the Australian trade surplus narrowed further than anticipated in August this failed to offer the GBP/AUD exchange rate any boost.

The Australian Dollar was quick to shake off the impact of the disappointing trade data, even as exports were found to have contracted -3% on the month.

While confidence in the global trade outlook remains generally limited AUD exchange rates were able to find a positive footing on Thursday.

As markets had already effectively priced in the likelihood of the Reserve Bank of Australia (RBA) cutting interest rates after Tuesday’s meeting the downside potential of the Australian Dollar was limited.

Fresh Signs of RBA Dovishness May Dent Australian Dollar Demand

However, the mood towards the Australian Dollar could sour ahead of the weekend if comments from RBA assistant governor Luci Ellis prove dovish.

Fresh evidence of policymakers adopting a cautious outlook in response to weakening global conditions may put AUD exchange rates on the back foot once again.

On the other hand, if Ellis appears to take a less dovish line on monetary policy this could help the Australian Dollar to recover more of its recent losses.

A solid rebound from August’s retail sales data may also offer the antipodean currency a rallying point tomorrow, with forecasts suggesting moderate growth of 0.5% on the month.

Anxiety over Lack of Brexit Progress Set to Limit GBP/AUD Exchange Rate Support

Developments surrounding Brexit look set to keep the GBP/AUD exchange rate under pressure in the days ahead, with investors seeing limited odds of an imminent breakthrough.

With EU officials having shown little enthusiasm for Boris Johnson’s ‘final offer’ the risk of talks breaking down appears to have risen.

As less than a month is now left before the current deadline any failure to move negotiations forward could put heavy pressure on GBP exchange rates.

The lingering risk of the UK crashing out of the EU without a deal could drag on Pound Sterling, especially given existing signs of weakness within the domestic economy.

Unless a mutually agreeable solution to the issue of the Irish border materialises a sense of political and economic anxiety is likely to keep the GBP/AUD exchange rate biased to the downside.

Louisa Heath

Contact Louisa Heath