A better-than-expected GfK UK consumer confidence index offered support to the Pound Australian Dollar (GBP/AUD) exchange rate on Thursday.
While the index remained firmly in negative territory investors were still encouraged by signs that sentiment is recovering in spite of lingering Brexit-based uncertainty.
An unexpectedly sharp uptick in net consumer credit in April offered further support to GBP exchange rates, meanwhile.
This stronger showing encouraged hopes that the Bank of England (BoE) will return to a hawkish policy bias in the months ahead, easing worries over the growth outlook.
Even so, the GBP/AUD exchange rate struggled to maintain any particular strength for long thanks to an improved sense of market risk appetite.
Australian Dollar Strengthens in Response to Solid Chinese Manufacturing Data
Demand for the Australian Dollar strengthened on the back of April’s private sector credit data, which defied forecasts to hold steady at 5.1% on the year.
This encouraged a sense of optimism in the outlook of the Australian economy, even though the first quarter private capital expenditure figure proved disappointing.
The risk-sensitive Australian Dollar also benefitted from a stronger Chinese manufacturing PMI, with the world’s second largest economy continuing to demonstrate signs of resilience.
A solid Chinese manufacturing sector bodes well for base metal prices, something which should shore up the commodity-correlated AUD.
Even though the latest raft of US data proved positive on Thursday afternoon this was not enough to knock AUD exchange rates off a general uptrend.
However, the Australian Dollar looks vulnerable to fresh downside pressure if US non-farm payrolls show an improvement on Friday.
Additional signs of tightening within the US labour market are likely to encourage the Federal Reserve, to the detriment of AUD exchange rates.
Tonight’s Australian manufacturing PMI, on the other hand, may give investors further cause for confidence in the Australian Dollar if the sector shows stronger growth.
Volatility Forecast for GBP/AUD Exchange Rate on UK Manufacturing PMI
Although the rise in net consumer credit does not bode overly well for the outlook of UK households, which remain heavily reliant on debt, this failed to weigh on the Pound.
Investors instead took encouragement from the implications that the data has for spending, which is expected to pick up on the back of this result.
As higher levels of consumer spending have helped to shore up the UK economy in the wake of the Brexit vote this is likely to encourage BoE policymakers going forward.
James Smith, Developed Markets Economist at ING, commented:
‘It’s not something markets or analysts typically spend much time looking at each month, but the unexpectedly sharp fall in consumer credit in March was probably a key factor in the Bank of England’s decision to keep rates on hold in May.
‘Admittedly the reasons for this sudden decline were fairly unclear, and the latest figures released today show that the amount of unsecured consumer credit supplied fully recovered in April, rising by £1.8 billion. This tentatively suggests the fall was simply a blip, perhaps related to the wider economic slowdown in March (although it’s not entirely clear why the bad weather would have resulted in such a sharp change).
‘Meanwhile, consumers continue to remain cautious. While household incomes are no longer being squeezed quite as much as before, shoppers are now being confronted with higher petrol prices, and the latest confidence surveys suggest individuals remain pessimistic about the economic situation overall.
‘The cracks forming in the retail sector remain a risk to the Bank of England outlook.’
The Pound may find a fresh rallying point on the back of Friday’s UK manufacturing PMI, though, providing the figure points towards a greater level of economic activity.
If the sector shows a loss of momentum, however, this could weigh heavily on the GBP/AUD exchange rate.
Unless the UK economy shows signs of having rebounded in the second quarter the appeal of the Pound is likely to remain somewhat limited.
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