Pound Australian Dollar (GBP/AUD) Exchange Rate Tumbles as Optimistic RBA Leaves Rates on Hold

GBP/AUD Exchange Rate Plummets after RBA Rate Decision

The Pound to Australian Dollar (GBP/AUD) exchange rate is on the defensive this morning as markets react to the Reserve Bank of Australia’s (RBA) first policy meeting of 2020.

At the time of writing the GBP/AUD exchange rate is trading at around AU$1.9351, down roughly 0.3% from today’s opening rate.

Australian Dollar (AUD) Surges as RBA Keeps Rates on Hold

The Australian Dollar (AUD) shot higher against the Pound (GBP) and the majority of its other peers this morning in response to the RBA’s decision to keep interest rates on hold this month.

While expectations for a February rate cut had eased significantly in recent weeks, AUD investors were still pricing in an outside chance that the RBA could pursue a cut this month.

Further buoying the ‘Aussie’ was the RBA’s surprisingly optimistic economic outlook, with the bank leaving its growth forecasts unaltered after an improvement in economic indicators through the last quarter of 2019.

Philip Lowe, Governor of the RBA said in his accompanying statement:

‘The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries.

‘A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3% target range,” Lowe said. “Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.’

Despite the RBA’s upbeat outlook many analysts expect that we are likely to see some form of easing of monetary policy before June as the disruption caused by the bushfires and coronavirus outbreak are likely to negatively impact domestic growth.

Pound (GBP) Stabilises on Improved Construction Sector Activity

At the same time, the Pound (GBP) has clawed back some of its initial losses this morning on the back of the UK’s latest construction PMI.

According to data published by IHS Markit, the construction index jumped from 44.4 to 48.4 in January, beating forecasts of a more modest rise to 46.6.

This was the strongest construction reading since May and puts the sector closer to the 50 mark which separates growth from contraction.

The improvement appears to be a part of the much vaunted ‘Boris Bump’ with firms more confident in investing in major UK projects following Boris Johnson’s victory in December’s general election.

GBP/AUD Forecast: Rebound in UK Services Sector to Support Sterling?

Looking ahead, the Pound to Australian Dollar (GBP/AUD) exchange rate may look to tick higher in the mid-week with the publication of the UK’s latest services PMI.

The final print of January’s figures are expected to confirm growth in the service sector jumped to a two-year high, potentially offering some respite to GBP exchange rates.

Meanwhile the focus for AUD investors through the second half of the week will be the publication of Australia’s latest trade balance and retail sale figures.

While another healthy trade surplus is likely to reflect well on the ‘Aussie’, any upside in AUD exchange rates may be offset by an expected contraction in domestic sales growth in December.

Matthew Andrews

Contact Matthew Andrews