Following a rise in market demand for risky trade-correlated currencies towards the end of last week, the British Pound to Australian Dollar (GBP/AUD) exchange rate has struggled to hold its ground this week so far. Still, the Pound was able to recover from its worst levels due to UK political news and growth stats
Last week saw weakness in both currencies leaving GBP/AUD trending within a tight region. GBP/AUD edged slightly higher from 1.7835 to 1.7890 throughout the week, but on Monday the pair slumped to a three-week-low of 1.7693. On Tuesday, GBP/AUD recovered slightly from this low but still only trended at around 1.7815.
GBP Rebounds from Lows as UK Political Fears Recede for Now
It’s been a busy couple of days for the Pound since markets opened on Monday, as investors have been reacting to the sudden escalation and de-escalation of UK political jitters.
On Sunday night, David Davis resigned from his position as UK Brexit Secretary, and was followed by Boris Johnson resigning from his Foreign Secretary position on Monday.
Johnson’s resignation in particular was concerning to Pound investors, as Boris had been a figurehead advocate for a ‘hard Brexit’. The news briefly worsened concerns that a challenge to UK Prime Minister Theresa May’s leadership may have been imminent.
However, on Tuesday Theresa May’s position seemed to be perceived by political analysts as still sturdy
As May confirmed she would fight off any no-confidence vote or political challenge, investors became more confident that she was unlikely to be brought down by a no-confidence vote.
Political news gave Sterling a further boost after comments emerged from Michel Barnier on Tuesday afternoon. The European Chief Negotiator indicated that despite the recent silence on Brexit negotiations, 80% of a Brexit deal had been agreed.
He expressed confidence that the remaining 20% on a full deal could be reached by October or November, and also expressed satisfaction with the UK government’s latest Brexit plans:
‘that the UK is discussing the future relationship, taking positions… and avoiding a hard border between Ireland and Northern Ireland.
We need clarity for these negotiations to move forward for the time is very short.’
Sterling was also supported on Tuesday by the publication of Britain’s first monthly Gross Domestic Product (GDP) report. May’s figure improved to 0.3%, following a confirmed 0.2% reading for April.
However, the data was not strong enough to help the Pound recover all of its Monday losses against a stronger Australian Dollar.
Investors remained anxious about the lack of balance in UK economic growth, with the nation’s services sector still far outperforming other sectors. It left investors more anxious about the lack of clarity on how Britain’s services sector would be impacted by the Brexit process.
AUD Climbs Amid Lack of Trade War Developments
Despite a trade war beginning between the US and China last week, a lack of any notable developments since then has made investors less hesitant to buy the risky Australian Dollar.
Investors have been taking a break from buying safe haven currencies like the US Dollar (USD), and have sold it from its highs due to some underwhelming US wage growth data.
Weakness in the US Dollar (USD) and a brief boost in demand for riskier currencies helped the Australian Dollar to rebound from its recent lows.
This is despite Australia’s latest business confidence data, which came in short of expectations.
Australia’s business confidence report from NAB unexpectedly slipped from 7 to 6 in June, though the previous figure was revised higher from 6 to 7.
GBP/AUD Forecast: UK Political Developments and Australian Confidence Data in Focus
Economic data is unlikely to be particularly influential to Pound trade in the coming days, but the Pound to Australian Dollar exchange rate is more likely to react to react to UK political developments and risk sentiment regardless.
If UK Prime Minister Theresa May continues to maintain a grip on her government and push forward her current Brexit plan, investors may become more optimistic about the Brexit process and the Pound outlook would improve.
On the other hand though, if hard Brexit supporting backbenchers indicate that a leadership challenge could still happen, the Pound would weaken and the Australian Dollar would easily strengthen.
That is, if markets continue to find risky currencies appealing.
The Australian Dollar has been benefitting from risk-sentiment in recent sessions, but the risk-rally could reverse if US trade jitters worsen again.
Wednesday’s Australian consumer confidence and home loans data, as well as an upcoming speech from Bank of England (BoE) Governor Mark Carney, could also influence the Pound to Australian Dollar (GBP/AUD) exchange rate.
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TAGS: Pound Australian Dollar Forecasts