Cautious RBA Outlook Limits Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Downside
The latest communication from the Reserve Bank of Australia (RBA) adopted a relatively bearish tone, helping to limit the downside bias of the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate.
Support for the Australian Dollar (AUD) weakened in response to comments from RBA Governor Philip Lowe, who noted that;
‘Whatever the timing of the recovery, when it does come, we should not be expecting that we will return quickly to business as usual.’
‘Rather, the twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come.’
With markets bracing for the Australian economy to remain under pressure for the foreseeable future AUD exchange rates struggled to find any degree of traction.
The unprecedented decline in global oil prices seen overnight added to the cautious market mood, leaving the risk-sensitive Australian Dollar lacking in appeal.
UK Unemployment Data Fails to Encourage Pound Sterling Demand
While the UK unemployment rate picked up from 3.9% to 4.0% in February this uptick predated the impact of the economic shutdown.
As a result, the mood towards Pound Sterling (GBP) turned generally negative as investors price in the odds of a far higher increase in unemployment still to come.
With some analysts forecasting that unemployment could rise as high as 9% before the end of the year there appeared little reason to favour the Pound over its rivals today.
February’s weaker-than-expected average weekly earnings data also put a dampener on the Pound, further limiting the potential for GBP/AUD exchange rate gains.
Easing UK Inflation May Offer Relief to Struggling Households
Some of the pressure on the Pound could ease on Wednesday, however, if March’s UK consumer price index data offers investors cause for reassurance.
While the headline inflation rate looks set to fall away from the Bank of England’s (BoE) 2% target a lower level of inflation would alleviate some of the pressure currently faced by UK households.
If a smaller degree of price inflation helps to insulate households from the fallout of the current Covid-19 shutdown this could improve the odds of the economy bouncing back in the following quarters.
On the other hand, as investors brace for the release of April’s UK manufacturing and services PMIs this may hamper any potential GBP/AUD exchange rate uptrend.
Deeper Leading Index Contraction Forecast to Push Australian Dollar Down
Confidence in the outlook of the Australian economy could weaken further, meanwhile, on the back of the latest Westpac leading index.
Forecasts point towards the index dipping deeper into negative territory in March, indicating that the economy remained in a downtrend at the end of the first quarter.
As long as Australia appears at risk of suffering an imminent slip into recession this could keep AUD exchange rates on the back foot.
Wider market developments could also put the Australian Dollar under pressure in the coming days, with any fresh deterioration in risk appetite likely to bolster the GBP/AUD exchange rate.