Pound Australian Dollar (GBP/AUD) Exchange Rate Capitalises on RBA Rate Cut Hints

Pound Australian Dollar (GBP/AUD) Exchange Rate Benefits as RBA Signals Willingness to Cut Rates

The relatively dovish nature of the latest set of Reserve Bank of Australia (RBA) meeting minutes helped the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate gain fresh ground.

In explaining their reasoning for September’s interest rate cut policymakers acknowledged a willingness to cut rates further in the months ahead, leaving the Australian Dollar (AUD) exposed to selling pressure.

As Bill Evans, chief economist at Westpac, noted:

‘The Board is clearly leaving itself the flexibility to move in November but we believe the hurdle is high and while the minutes leave us with little doubt that another cut is expected we are holding to the view we adopted in July that the next moves would be in October and February.’

With markets continuing to price in the likelihood of interest rates falling to fresh record lows AUD exchange rates were left on the back foot.

Doubts Over Likelihood of Brexit Deal Fail to Dent Pound

While EU officials indicated increasing doubt over the possibility of agreeing a Brexit deal this week Pound Sterling (GBP) still maintained a positive footing against its rivals.

Even though the Irish border issue continues to confound negotiations the GBP/AUD exchange rate continued to edge higher over the course of the morning.

As chief EU negotiator Michel Barnier set a midnight deadline for Boris Johnson to agree to the EU’s proposal for the customs border to fall in the Irish Sea the Pound remained impervious.

Markets continued to hope for an imminent breakthrough as Johnson’s government attempted to shore up support for a deal among MPs, although an air of uncertainty still lingered over the political landscape.

Rising UK Inflation Forecast to Buoy GBP Exchange Rates

GBP exchange rates could find fresh support on the back of September’s UK consumer price index data tomorrow.

With forecasts pointing towards the headline inflation rate rising from 1.7% to 1.8% on the year, pushing closer to the Bank of England’s (BoE) 2% target, investors could find renewed cause for confidence.

A higher inflation rate would give BoE policymakers greater incentive to leave interest rates on hold in the near future, limiting the risk of a potential rate cut.

Although recent earnings figures suggested that UK wage growth is starting to stall investors are unlikely to react poorly to a stronger inflation figure, regardless of its impact on household finances.

Signs of Slowing Labour Market Set to Drag on Australian Dollar

Worries over the health of the Australian economy look set to persist over the coming days, meanwhile, as markets brace for the latest set of labour market data.

As the RBA has previously expressed concern over the health of the labour market any deterioration here would add to the case for another interest rate cut to fall sooner rather than later.

Evidence of weaker growth in employment could thus see AUD exchange rates extending their downtrend.

A deteriorating sense of global market risk appetite may also put a dampener on the Australian Dollar as markets continue to weigh up the impact of the recent partial trade deal agreed by the US and China.

Any fresh signs of trade tensions picking up could weigh heavily on the risk-sensitive Australian Dollar, to the benefit of the GBP/AUD exchange rate.

Louisa Heath

Contact Louisa Heath