Pound Australian Dollar (GBP/AUD) Exchange Rate Rangebound as UK’s Private Sector Continues to Shrink

Pound Australian Dollar (GBP/AUD) Exchange Rate Narrows as UK Private Sector Continues Contracting

The Pound Australian Dollar (GBP/AUD) exchange rate is narrowing today, as the UK economy enters a fourth month of contraction.

At the time of writing, GBP/AUD was trading at roughly AU$1.7914, showing little change from the morning’s opening rates.

Pound (GBP) Muted as UK Private Sector Enters Fourth Month of Contraction

The Pound (GBP) is rangebound this morning, as the UK PMI data showed another month of contraction.

Both manufacturing and service indexes remained at 46.2 and 48.8 respectively. While neither showed further falls, there was a marked decline in new orders, reaching a two year low.

Similarly, manufacturing production continued to decline faster than service sector activity, adding to fears of a deep recession.

Chris Williamson, the Chief Business Economist at S&P Global Market Intelligence commented on the data. He stated:

‘If pandemic lockdown months are excluded, the PMI for the fourth quarter so far is signalling the steepest economic contraction since the height of the global financial crisis in the first quarter of 2009, consistent with the economy contracting at a quarterly rate of 0.4%.’

With the UK’s economic outlook continuing to darken, investors remained cautious.

Australian Dollar (AUD) Restricted by Private Sector Slowdown

The Australian Dollar (AUD) is struggling for support this morning, as last night’s PMI flashes showed private sector slowdowns.

Manufacturing indexes slowed from 52.7 to 51.5 and service indexes contracted further to 47.2. As such, the tightening policy employed by The Reserve Bank of Australia (RBA) may be finally slowing the Australian economy.

The PMI report highlighted future issues the economy face. It states:

‘Some businesses anticipate demand to soften in the next quarter. Elevated input costs and difficulties with freight were reported across all sectors and locations.’

Further capping the ‘Aussie’ is the currency’s nature as a Chinese proxy. With Covid cases continuing to rise in China, AUD is limited by the Chinese Yuan’s (CHY) weakness. Questions remain over China’s economic future as key factories remain isolated, sparking protests at the Foxconn plant in Zhengzhou.

Despite this, a market shift towards risk-on trade has served to cushion the risk-sensitive AUD somewhat, prompting the rangebound trade.

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: UK Industrial Trends to Dent Sterling?

Looking ahead for GBP/AUD, the core catalyst of movement may be Thursday’s industrial trends orders for the UK.

With a fall expected from -4 to -8, the data may show a slowdown in factory orders. In turn, this may prompt anxiety around the UK’s economic outlook, with the recession bearing down on production.

For AUD, the main drivers of movement are likely to be market risk-sentiment and any developments in China’s Covid outbreak. Should the markets continue to be risk-positive, the ‘Aussie’ may see gains.

However, if Covid cases continue to rise in China, the ‘Aussie’ may be weakened by its nature as a proxy-currency.

John Mulcahey

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