Pound Australian Dollar (GBP/AUD) Exchange Rate Stumbles as UK Manufacturing Deterioration Deepens

Underwhelming UK Manufacturing PMI Limits Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Support

A slight upward revision of the finalised UK manufacturing PMI was not enough to prevent it from hitting its second weakest level since 2012, limiting support for the Pound Sterling to Australian Dollar (GBP/AUD).

With the index sitting deep within contraction territory at 47.5 in December confidence in the outlook of the UK economy remained muted as fears of sustained weakness grew.

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

‘The pace of manufacturing’s decline in December will set alarm bells ringing as production levels sank at their fastest levels since July 2012 and with no sign of immediate recovery in sight.’

Although the manufacturing sector only accounts for a modest percentage of economic activity within the UK this latest sign of weakness still put a dampener on Pound Sterling (GBP).

In the absence of any particular certainty over Brexit, given lingering concerns over the short nature of the upcoming transition period, investors saw little reason to support GBP exchange rates.

US-China Trade Deal Progress Boosts Australian Dollar

The Australian Dollar (AUD) found some support, meanwhile, as the US set a date to sign its phase one trade agreement with China.

However, AUD exchange rates struggled to gain any significant traction this morning thanks to the disappointing nature of December’s Chinese manufacturing PMI.

Although the sector remained in a positive state of growth investors were discouraged by this loss of momentum, remaining wary of the potential for a sustained slowdown in 2020.

As the latest Australian manufacturing index slipped further into a state of contraction this also limited the appeal of the Australian Dollar.

Lower UK Borrowing Figures Forecast to Weigh Down GBP/AUD Exchange Rate

Confidence in the underlying performance of the UK economy could take a fresh blow on Friday with the release of November’s consumer credit and mortgage approvals figures.

Any signs that lenders and households took a more cautious outlook in November could weigh on GBP exchange rates as worries over the economic outlook pick up.

Lower levels of borrowing would suggest that domestic confidence continued to weaken in the fourth quarter, reflecting a higher level of political uncertainty and Brexit-based jitters.

With the economy already showing signs of slowing anything short of a solid uptick in borrowing looks set to push the GBP/AUD exchange rate lower ahead of the weekend.

AUD Exchange Rates Remain Vulnerable to Lack of Market Risk Appetite

Any faltering in market risk appetite could see the Australian Dollar fall out of favour, on the other hand.

With forecasts pointing towards a deterioration in December’s Australian services PMI confidence in the economic outlook looks set to weaken further.

However, if the latest set of Federal Open Market Committee (FOMC) meeting minutes show a greater sense of dovishness this could encourage AUD exchange rates to strength.

As long as the Fed appears on course to cut interest rates again in the near future the appeal of higher-yielding assets such as the Australian Dollar are likely to improve, to the detriment of the GBP/AUD exchange rate.

Louisa Heath

Contact Louisa Heath