GBP AUD Exchange Rate Capitalises on Market Jitters Over US Protectionism

July 23, 2018 – Written by David Woodsmith

The Pound Sterling Australian Dollar exchange rate surged higher on Monday afternoon as market risk appetite deteriorated further.

As the Chinese Yuan continued to weaken this weighed heavily on demand for the risk-sensitive Australian Dollar.

Markets remain wary of the prospect of global trade tensions continuing to escalate thanks to the protectionist rhetoric of the Trump administration, with the threat of further tariffs hanging over international trade.

While markets braced for the latest commentary from Bank of England (BoE) deputy governor Ben Broadbent this failed to particularly weigh on the GBP/AUD exchange rate.

GBP/AUD Exchange Rate Volatility Forecast Ahead of Australian Inflation

A stronger US Dollar also helped to push AUD exchange rates lower at the start of the week, with US data continuing to paint a positive picture of the domestic economy.

As concerns over the political independence of the Federal Reserve eased this left the Australian Dollar on a weaker footing, with policy divergence between the Fed and the Reserve Bank of Australia (RBA) looking set to widen.

Analysts at Westpac commented:

‘Again, the RBA said the next move “would more likely be an increase than a decrease”, although they re-introduced the notion that a stable cash rate would be a source of stability and confidence.

‘However the key data release last week was very strong employment data for the month of June. Australian employment increased by 51k in June, well above expectations, with full time jobs contributing most of the gains.

‘Although the unemployment rate held at 5.4% as the participation rate rose as workers were pulled into the workforce. This responsiveness of labour supply does show why wages have been slow to respond to this employment strength. And while a strong result, momentum is still slowing from the peak in employment growth seen in 2017.

‘This week brings a number of important events globally and locally. (…)

‘Domestically, the highlight will be June’s CPI print. Our economics team is expecting another benign print, and it is worth noting that for the last 18 months consensus forecasts have overestimated inflation outcomes and inflation remains far from threatening the RBA outlook.’

A stronger showing from Wednesday’s Australian consumer price index data could still offer a rallying point to the Australian Dollar, though.

If the headline second quarter inflation rate picks up from 1.9% to 2.2% as forecast the GBP/AUD exchange rate is likely to return to a downtrend.

While even a sharp increase in inflationary pressure is unlikely to prompt any major shift in the RBA’s outlook for the time being a stronger showing would still be enough to boost demand for the Australian Dollar.

However, if market risk appetite continues to deteriorate in response to US protectionism AUD exchange rates may struggle to gain any fresh traction.

Weaker Business Confidence to Weigh on GBP/AUD Exchange Rate

In the absence of any domestic data the Pound saw rather limited momentum today, even as investors awaited the latest BoE commentary.

If Broadbent shows any signs of hawkishness, however, the mood towards Sterling is likely to pick up sharply.

As the odds of an August interest rate hike from the BoE have diminished significantly over the last weeks markets are keen for some policymaker guidance.

However, if Broadbent fails to offer any particular indication regarding the current policy outlook of the BoE the Pound could slump once again.

Investors are unlikely to find any cause for confidence on the back of tomorrow’s CBI business optimism index, which is forecast to weaken from -4 to -6.

Evidence that business sentiment continued to deteriorate at the start of the third quarter could weigh heavily on the GBP/AUD exchange rate.

As a significant degree of Brexit-based uncertainty still hangs over the domestic outlook any weakening of business confidence may deal a sharp blow to demand for the Pound.

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TAGS: Pound Australian Dollar Forecasts