Pound Australian Dollar (GBP/AUD) Exchange Rate Fluctuates as Currency War Fears Fueled by Trump Remarks

July 20, 2018 – Written by John Cameron

The Pound Australian Dollar (GBP/AUD) exchange rate has been met by volatility today as markets are spooked by the prospect of a currency war, following comments from President Trump.

Australian Dollar (AUD) Exchange Rate Volatile as Trump Remarks Herald Possible Trade War

The Australian Dollar (AUD) has seen some considerable shifts in movement over the past couple of days, with the currency on a veritable rollercoaster as recent developments suggest markets may need to brace for a currency war.

This started with the devaluing of the Chinese Yuan (CHY) on Thursday, with the currency plummeting to a one-year low against the US Dollar (USD).

The People’s Bank of China (PBOC) made no effort to prevent this, leading analysts to interpret this as China’s response to US trade tariffs and driving the Australian Dollar lower due to Australia’s extensive trade relationship with China.

However Trump did not take this lying down as he launched a scathing attack on the US Federal Reserve, suggesting he was ‘not thrilled’ by the bank’s recent policy of raising interest rates and consequently the value of the US Dollar.

Speaking in an interview with CNBC Trump said:

‘I don’t like all of this work that we’re putting into the economy and then I see rates going up. Because we go up and every time you go up they want to raise rates again, I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.’

The remarks had an immediate impact on the US Dollar, driving it lower during the Asian trading session on Friday and giving the Australian Dollar some breathing room.

However at the same time with Trump’s remarks stoking fears that the US could engage in a currency war with China, the ‘Aussie’ found its rally somewhat undermined as market risk appetite diminished.

Pound (GBP) Exchange Rate Stabilises as UK Government Borrowing Falls to 11-year low

While still facing some volatility against the Australian Dollar given the current fears of a currency war, the Pound appears to have stabilised against the majority of its other peers this morning following the release of the UK’s latest public borrowing figures.

According to data published by the Office for National Statistics (ONS), the UK government has had to borrow £16.bn to balance the books so far in the 2018/19 financial year, £5.4bn less than at the same point in 2017.

While June’s borrowing figure was slightly higher than expected, £4.53bn against forecasts of £3.5bn, the data still points to borrowing falling faster than expected.

This has helped to buoy the pound this morning on hopes that it will give Chancellor Philip Hammond a little more room for flexibility in his autumn budget, possibly lending some support to the UK’s ailing economy.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said:

‘Since the chancellor’s target merely is to reduce cyclically-adjusted borrowing to below 2% of GDP by 2020-21, he has scope to scrap the remaining austerity measures planned for the next two years.

Given that the Conservatives now lag Labour in the opinion polls and Brexit must be seen to be a success, we see no reason why the chancellor wouldn’t opt to soften his plans in the Budget later this year.’

GBP/AUD Exchange Rate Forecast: Will Rising Inflation Prompt an Uptick in the ‘Aussie’ Next Week?

Looking ahead to next week’s session, the most notable data release is expected to be Australia’s second quarter inflation reading.

This could prompt some notable movement in the Pound Australian Dollar (GBP/AUD) exchange rate, with an expected rise in inflation in the three months to June potentially driving the ‘Aussie’ higher on Wednesday.

Meanwhile the latest data from the Confederation of British Industry (CBI) could drive some movement in Sterling next week, with the CBI’s latest surveys of the manufacturing and retail sectors potentially driving the Pound exchange lower if the indexes print lower as forecast.

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