GBP/AUD Plummets on US Data, Recovers as UK GDP Revised Up
(Updated 15:15. 01/09/2023) The Pound Australian Dollar (GBP/AUD) exchange rate fell steeply this afternoon as the latest US employment data was released. The country’s increasing unemployment levels indicated that the labour market is cooling and the Federal Reserve may abandon hawkish monetary policy ahead, setting an example for other central banks to cease hiking interest rates.
The prospect of a slow decline in interest rates has brought cheer to consumers, who anticipate a more stable economy ahead. The upswing in sentiment is a boost for risk-sensitive currencies such as the ‘Aussie’ and may explain the currency’s spike upward.
Shortly after rocketing, however, AUD/GBP dropped back down. This may be a result of markets’ considered response to US data – after all, lower interest rates means smaller returns on currency investments. On the other hand, a trend up in GBP exchange rates may be partially to blame as the Office for National Statistics (ONS) revealed that the UK economy recovered faster from the Covid-19 lockdowns than previously thought.
Revising assessments that GDP had been 1.2% below pre-pandemic levels by the end of 2021, the ONS announced that in fact it was 0.6% higher – putting the UK economy in third place for the fastest recovery during that period.
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Pound Australian Dollar (GBP/AUD) Exchange Rate Ticks Lower on Risk-Off Mood
The Pound Australian Dollar (GBP/AUD) exchange rate weakened during today’s Asian session although China’s latest manufacturing PMI printed above forecasts. The strong trading relationship between China and Australia means Chinese tailwinds invariably buoy the Australian Dollar; but a risk-off mood ahead of today’s key US data may have been preventing AUD gains.
At the time of writing, GBP/AUD is trading at A$1.9559, having traded marginally higher in the past 24 hours.
Australian Dollar (AUD) Struggles to Firm ahead of Major US Data
The Australian Dollar fell overnight against the Pound (GBP), despite an uptick in China’s manufacturing activity. The Caixin PMI for August eased out of contraction territory, printing at 51 rather than the 49.3 expected.
At midnight GMT, Australia’s latest manufacturing report also impressed, coming in at 49.6 rather than 49.4. Nevertheless, the fact that activity across the sector remains in contraction likely kept a lid on trader optimism.
Perhaps dampening investor morale into the European session was the prospect of a mixed employment release from the US: major data from the country influences the entire currency market given the US economy is the world’s largest.
If nonfarm payrolls fell as expected in August, signaling a cooling labour market, the prospect of a hawkish Federal Reserve may be called into doubt – subsequently invoking uncertainty over the stance of other global central banks.
Ahead of the release, markets are trading with relative caution, supporting safe-haven currencies such as the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). As a risk-sensitive asset, the ‘Aussie’ is less likely to attract trade in such an environment.
Pound (GBP) Buoyed by Finalised Manufacturing PMI
The Pound is wavering against its peers today but avoided major losses this morning as the final reading of August’s S&P Global/CIPS Manufacturing PMI printed above forecasts.
The release came in at 43 rather than 42.5: still in contraction territory but buoyed by improving business confidence. Commenting on the data, John Glen – chief economist at the Chartered Institute of Procurement & Supply – said the data provided ‘small crumbs of comfort’ for manufacturers.
Tailwinds based on the release are likely to be limited, as the data isn’t solely positive. Analysts warn that ‘[the] brief upturn in manufacturing production in June is probably not a real positive’ given the extra working day following King Charles’s coronation.
Moreover, a spokesperson from S&P Global – who helped to compile the data – said:
‘Manufacturers are reporting a weakening economic backdrop, as demand is hit by rising interest rates, the cost-of-living crisis, export losses and concerns about the market outlook.’
Also capping Sterling gains today is news that house prices have fallen at their fastest rate in 14 years. With steep mortgage rates and generally higher living costs weighing on house-seekers’ budgets, analysts have suggested that the tumble was inevitable.
GBP/AUD Exchange Rate Forecast: RBA Rate Decision Eyed?
This afternoon, the latest US data is likely to have an impact on currency markets in a broad sense: if unemployment in the US rose unexpectedly, or fewer jobs were added to the economy than anticipated, USD could tumble and risk appetite may deteriorate further.
Such an outcome would likely pressure the risk-sensitive ‘Aussie’, boosting GBP/AUD.
Looking ahead to next week, Tuesday’s interest rate decision from the Reserve Bank of Australia (RBA) is expected to yield no change: analysts at Standard Chartered observed this week that they ‘now expect only one more 25bps hike in November vs 25bps hikes each in September and November.’
Yet there is a small possibility the central bank will decide to hike – with a degree of uncertainty hanging over AUD investors, traders may strike a bearish tone in the interim.