Pound Australian Dollar (GBP/AUD) Exchange Rate Loses 4-Year High in Spite of BoE Rate Slash

Hopes of Greater UK Government Support Shores up GBP/AUD Exchange Rate

UPDATE: The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate recovered its upward momentum this afternoon as worries over the UK economic outlook showed fresh signs of stabilisation.

With the government moving to offer further support to ailing businesses the mood towards Pound Sterling (GBP) turned positive once again, even though the disruption from Covid-19 looks increasingly set to linger for many months to come.

Recovery in Commodity Prices Knocks Pound Australian Dollar (GBP/AUD) Exchange Rate off High

After hitting a fresh four-year high yesterday the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate failed to hold onto its positive momentum as market anxiety temporarily eased.

However, while oil prices bounced back from their seventeen-year lows, along with other commodities, the Australian Dollar (AUD) still looks vulnerable to selling pressure.

With the global economic impact of the Covid-19 crisis still unfolding investors may lack the incentive to support AUD exchange rates in the longer term.

As analysts at HSBC warned:

‘‘Risk-on-Risk-off’ (RORO) is firmly in the driving seat and the AUD is the most risk-sensitive G7 currency, helping to explain why it is also the worst performer this year.

‘It seems unlikely that the AUD will turn around until equities bottom.’

GBP/AUD Exchange Rate Benefits from Emergency BoE Action

In the wake of the Bank of England’s (BoE) decision to cut interest rates to a new low yesterday support for Pound Sterling (GBP) has generally picked up.

Markets were largely caught off guard by the central bank’s emergency move, which cut interest rates from 0.25% to just 0.10% only a week after the BoE’s last policy action.

With the Treasury coming under increasing pressure to deliver further stimulus of its own, in order to better cushion the UK economy from the impact of Covid-19, GBP exchange rates look set to hold onto a positive footing.

However, as UK government debt appears on course to swell significantly as the response to the crisis steps up worries over the long-term economic health of the UK may linger.

Weak March PMIs to Limit Australian Dollar Demand

As long as the global market anxiety persists the potential for any Australian Dollar recovery appears limited.

With markets doubtful that the economy can avoid falling into a state of recession in the first half of 2020 the appeal of risk-sensitive assets looks set to remain muted for some time to come.

March’s Australian manufacturing and services PMIs may put an additional dampener on the Australian Dollar, with forecasts pointing towards fresh weakness.

If both the manufacturing and service sectors slip into a state of slowdown this would raise the risk of a first quarter growth contraction, pushing AUD exchange rates lower across the board.

On the other hand, a resilient performance from the manufacturing sector could help to keep a floor under the Australian Dollar at the start of the week.

Signs of UK Economic Slowdown to Provoke Fresh Pound Volatility

While focus looks set to remain on developments surrounding Covid-19 the GBP/AUD exchange rate could see some marked volatility on the back of March’s UK PMIs.

After the solid showings the manufacturing and service sectors delivered in February the PMIs appear on track to weaken, thanks to the economic disruption seen in the last month.

If either PMI slips below the neutral baseline of 50 this could put the Pound under renewed pressure, particularly if the service sector shows a slowdown.

As long as the risk of a negative first quarter gross domestic product reading persists this could prevent the GBP/AUD exchange rate from returning to its recent highs.

Louisa Heath

Contact Louisa Heath