Pound Australian Dollar (GBP/AUD) Exchange Rate Muted as UK Growth Stagnates

Stagnant Fourth Quarter UK Growth Weighs on Pound Australian Dollar (GBP/AUD) Exchange Rate

As the fourth quarter UK gross domestic product showed stagnant growth the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate remained on the back foot.

While quarterly growth proved lacklustre, though, the report still offered investors some underlying causes for confidence.

A 0.3% uptick in December suggests that the economy could recover some of its lost momentum as a result of the general election outcome, thanks to an easing in political uncertainty.

With markets hopeful that the UK economy will bounce back in the first quarter the negative impact of the GDP data proved muted, benefitting Pound Sterling (GBP).

Even so, confidence in the health of the economy still diminished, as the Office for National Statistics report noted:

‘The underlying picture for production was one of weakening throughout 2019, with nine months of the year showing negative rolling three-month growths.’

Australian Dollar Recovers as Global Coronavirus Fears Temporarily Ease

Speculation that the spread of the Wuhan coronavirus strain has started to slow encouraged investors to buy back into the Australian Dollar (AUD), meanwhile.

With the rate of infection showing signs of stabilising this fuelled bets that the ultimate economic impact of the outbreak could prove more limited than initially feared.

AUD exchange rates gained a further boost from December’s Australian home loans figure, which showed an unexpectedly strong uptick of 3.5% on the month.

As households appeared to adopt a more optimistic outlook in the final month of 2019 investors were encouraged to bet on the prospect of stronger economic growth to come in the months ahead.

AUD Exchange Rates Vulnerable to Softer Consumer Confidence

However, the mood towards the Australian Dollar could easily sour once again if the Westpac consumer confidence index fails to impress tonight.

Unless consumer sentiment shows a solid improvement in February the GBP/AUD exchange rate could find a rallying point overnight.

Any indication that consumers turned cautious this month may fuel a greater degree of anxiety over the economic outlook, with lower consumer spending likely to drag on wider growth momentum.

If market risk aversion picks back up in the days ahead this could equally drag on the Australian Dollar, given the degree of uncertainty still surrounding the impact of the coronavirus outbreak.

UK-EU Trade Uncertainty Set to Limit Pound Sterling Upside

With clarity over the UK’s future relationship with the EU still decidedly lacking the potential for further GBP/AUD exchange rate weakness remains.

As long as the two sides appear on track for a prolonged period of negotiation the appeal of the Pound looks set to weaken.

The risk of an underwhelming first quarter growth rate could pick up if uncertainty over UK-EU trade continues to hang over the economy in the weeks ahead.

Unless the two sides show signs of progress towards a mutually agreeable deal the Pound is likely to remain vulnerable to selling pressure for the foreseeable future.

Louisa Heath

Contact Louisa Heath