Pound Australian Dollar (GBP/AUD) exchange rate firms on upbeat UK data
The Pound Australian Dollar (GBP/AUD) exchange rate is rising today as the UK’s finalised services PMI exceeded forecasts. Meanwhile in Australia, the latest trade balance release came in below expectations; a slowdown in Chinese serve-sector growth also weighed upon the Australian Dollar (AUD).
At the time of writing, GBP/AUD is trading at A$1.9348, having risen by almost 0.4% in the past 24 hours.
Pound (GBP) trades in mixed range as services PMI beats expectations
The Pound (GBP) is trading in a mixed range against its peers, despite a greater-than-expected increase in service sector activity in the month of January. The finalised services PMI from S&P Global printed at 54.3 rather than the 53.8 originally estimated.
The data marks the sharpest increase in activity in eight months, reflecting an increase in new business activity. S&P attributes this to strengthening economic conditions and client confidence ahead of expected interest rate cuts by the Bank of England.
Tim Moore, economics director at S&P Global Market Intelligence, observed: ‘New orders have also rebounded this winter as receding recession risks and looser financial conditions led to greater willingness-to-spend among clients.’
Nevertheless, activity in the manufacturing sector remains sluggish, potentially contributing towards Pound headwinds. Factories cited delays to deliveries from east Asia on account of shipping obstacles in the Red Sea.
Moreover, recent comments from Bank of England (BoE) officials suggest that interest rate cuts may not be enacted as promptly as markets anticipate. The BoE’s chief economist, Huw Pill, told reporters last week that a reduction in rates from the current level of 5.25% is still likely to be a way off.
Fresh data today showing that Britain’s unemployment rate was lower than previously thought late last year is likely to further deter the bank from cutting rates, indicating that the labour market is less threatened by tight monetary policy than initially thought.
Australian Dollar (AUD) dented by below-forecast trade balance
The Australian Dollar is weaker against the majority of other currencies today following a greater-than-expected narrowing of the country’s trade surplus in December. Exports increased by more than imports at the end of 2023, with outbound shipments to China advancing to a nine-month high of A$18.51bn.
Furthermore, January’s Caixin services PMI from China reported slowing growth in January, easing unexpectedly from 52.9 to 52.7. Given the close trading relationship between China and Australia, weak Chinese data invariably dents the ‘Aussie’.
Speculation amongst economists over the likelihood of China staging an economic rebound this year paint a gloomy picture. Tracy Chen, a portfolio manager at Brandywine Global, explains that China has been attempting to shift from an economy powered by real estate growth to one fuelled by energy, technology and manufacturing; yet DataTrek cofounders Nicholas Colas and Jessica Rabe wrote in a note last week:
‘China’s tighter rein on its tech companies over the last +3 years has put them at a serious disadvantage versus their US counterparts in public markets.’
Chen adds that growth in the new economy cannot offset the drag of the old economy at present.
Yet Mike Edwards, deputy chief investment officer at Weiss Multi-Strategy, tells Business Insider ‘we believe the turn can be engineered by demonstrating dedication to market-friendly policies’; offering a glimmer of hope.
If investment in the Chinese Yuan (CNY) picks up, this could bolster morale in Australia too, lifting the Australian Dollar.
GBP/AUD forecast: RBA decision in focus
The Pound Australian Dollar exchange rate is likely to trade on the decision of the Reserve Bank of Australia (RBA) tomorrow. The RBA is expected to leave interest rates on hold this month but may adopt a dovish tone given last week’s softer-than-expected inflation reading.
While cautiousness generally invokes bearish sentiment, investors hope that the following monetary policy statement from Governor Michele Bullock will provide some clarity on the RBA’s outlook ahead. Therefore, AUD may trade in either direction.
In the meantime, both the Pound and the ‘Aussie’ are likely to be influenced by key US data. Today’s ISM PMI is expected to reveal growth in the US services sector, which if it prints as expected will likely inspire risk-on trading conditions. In such a scenario, GBP/AUD may sink as the perceived-riskier ‘Aussie’ firms.