Pound Australian Dollar (GBP/AUD) Exchange Rate Rallies due to Split Odds of BoE Rate Cut

BoE Anticipation Fails to Prevent Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Recovery

Mounting anticipation ahead of the Bank of England’s (BoE) policy announcement was not enough to prevent the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate trending higher.

Although markets still see a 50% chance that BoE policymakers will follow through on earlier dovish comments and cut interest rates demand for Pound Sterling (GBP) picked up ahead of the meeting.

With today’s policy decision the last of current BoE Governor Mark Carney’s tenure investors see a significant likelihood that the central bank will opt to remain on hold.

Thanks to last week’s better-than-expected UK services PMI anxiety over the economic outlook appears to have eased, giving the BoE greater incentive to leave interest rates static in spite of Brexit-based uncertainty.

Global Economy Slowdown Fears Weigh Heavily on Australian Dollar Demand

The Australian Dollar (AUD), meanwhile, slipped further out of favour as anxiety over the spread of the Wuhan coronavirus lingered.

As global growth looks set to weaken in the first quarter thanks to the disruption the outbreak has already caused market risk appetite remained generally muted this morning.

Support for the AUD exchange rates weakened further thanks to the underwhelming nature of the fourth quarter Australian export price index.

A -5.2% slump in export prices suggests that the Australian economy came under fresh pressure in the final three months of 2020.

With the domestic economy already looking at risk of a slowdown this left investors with little reason to buy into the Australian Dollar.

Australian Dollar Vulnerable to Soft Chinese Manufacturing PMI

Risk sentiment could continue to weaken heading into the weekend as forecasts point towards another underwhelming Chinese manufacturing PMI reading.

Fresh evidence of a loss of momentum within the world’s second-largest economy may drive the Australian Dollar lower across the board tomorrow, given existing global slowdown fears.

As the Australian Dollar commonly functions as a market proxy for sentiment towards the Chinese economy any deterioration in the manufacturing sector could weigh heavily on AUD exchange rates.

On the other hand, if the manufacturing PMI demonstrates a return to expansion in the first month of the year this may pave the way for the Australian Dollar to rally.

Signs of Stronger UK Consumer Confidence May Encourage Pound Boost

The mood towards the Pound could sour, meanwhile, if January’s GfK consumer confidence index fails to show signs of improvement.

While forecasts suggest a modest uptick from -11 to -9 on the month, however, this would still represent another month of lacklustre domestic confidence.

If the index betters expectations to stage a return to positive territory, though, demand for the Pound could pick up sharply.

Increasing jitters ahead of the Brexit deadline could also see the GBP/AUD exchange rate stumble, given the elevated levels of uncertainty that still surround the future relationship between the UK and EU.

Louisa Heath

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