GBP to AUD Exchange Rate Recovers from Monday Slump as UK Services Beat Forecasts

June 5, 2018 – Written by Frank Davies

Following a surge in demand for the Australian Dollar at the beginning of the week, the British Pound to Australian Dollar (GBP/AUD) exchange rate recovered slightly on Tuesday. Britain’s latest services PMI data beat forecasts, bolstering hopes that Britain’s economy was rebounding and could see stronger growth later in the year.

Risk-aversion helped a weak Pound to drive GBP/AUD slightly higher last week, from 1.7594 to 1.7632. However, GBP/AUD plunged at the beginning of the week as the Australian Dollar was boosted by Australian data. GBP/AUD hit a low of 1.7394 on Monday – the pair’s lowest level since January. On Tuesday, GBP/AUD recovered slightly and trended closer to the level of 1.7566 at the time of writing.

GBP Demand Jumps as UK Services Sector Performs More Strongly Than Expected

Sterling finally found some stronger domestic support on Tuesday, in the form of Britain’s May services PMI from Markit.

Markit’s services print was originally forecast to have just risen slightly, from 52.8 to 53. However, the figure unexpectedly jumped to 54.

This indicated to investors that Britain’s economy may be seeing a stronger than expected rebound from the weakness seen at the beginning of the year.

Britain’s economic outlook improved slightly as a result of the data, and investors became a little more confident that the Bank of England (BoE) could still hike UK interest rates once before the end of the year.

However, despite the stronger than expected rebound, analysts were mixed on the report and argued that there was a lack of confidence in the outlook. According to Duncan Brock from the Chartered Institute of Procurement & Supply:

‘It felt as though the sector was losing its lifeblood this month as Brexit worries continued to claw away at confidence, new orders and business margins. The survey revealed clients and consumers were reluctant to spend with one of the lowest rises in new orders in the last two years, and though overall activity increased, it was at a restrained pace.

The sector will be looking for an urgent dose of clarity and direction from policymakers with Brexit less than a year away, because without a sound pipeline of new work coming through this creeping slowdown could become a state of stagnation, or worse.’

As a result of the analyst caution, Sterling’s gains were limited and it was unable to recover all of its Monday losses against a stronger Australian Dollar.

AUD Weakens on Unchanged RBA Decision

While the Australian Dollar was supported by a surprising jump in Australian retail sales in April on Monday, demand for the currency waned a little on Tuesday and this made it easier to GBP/AUD to recover from multi-month lows.

Tuesday’s biggest news was the Reserve Bank of Australia’s (RBA) June policy decision – and the biggest takeaway for investors was that nothing notable about the bank’s outlook had changed.

According to RBA Governor Philip Lowe, inflation is still likely to remain subdued for a while:

‘Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing,

A gradual pick-up in inflation is, however, expected as the economy strengthens.’

This news disappointed investors hoping for signs that the bank would become more hawkish.

Australia’s May services PMI report was solid, rising from 55.2 to 59. This helped the Australian Dollar to avoid further losses against Sterling.

GBP/AUD Forecast: Australian Growth Report in Focus

The Australian Dollar’s busy week continues on Wednesday, when Australia’s Q1 Gross Domestic Product (GDP) results will be published.

Australian growth is forecast to have improved from 0.4% to 0.9% quarter-on-quarter in Q1, and from 2.4% to 2.8% year-on-year.

Investors are concerned that weaker than expected Australian exports will have weighed on growth. If growth comes in lower than expected overall, the Australian Dollar could see weaker performance later in the week.

Amid a lack of upcoming UK ecostats until next week, this could leave Sterling with a free run higher.

However, Brexit uncertainties remain. If Brexit developments concern or disappoint investors, the Pound is likely to weaken again.

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TAGS: Pound Australian Dollar Forecasts