GBP to AUD Exchange Rate Surges on Australian Political Jitters

August 23, 2018 – Written by Frank Davies

Persistent concerns about the possibility of a ‘no deal’ Brexit have not been enough to prevent the British Pound to Australian Dollar (GBP/AUD) exchange rate’s advance this week. The Australian Dollar has plunged due to trade uncertainties and political turbulence in Australia.

More than regaining last week’s slip from 1.7483 to 1.7417, GBP/AUD has surged this week to its best levels in three weeks – since the beginning of the month. At the time of writing on Thursday, GBP/AUD trended in the region of 1.7690.

GBP Advances on Cautious Brexit Optimism Despite ‘No Deal’ Fears

UK and EU officials expressing hope that a solid UK-EU Brexit deal could still be agreed in the coming months have made investors a little more optimistic that a ‘no deal’ Brexit can be avoided too.

‘No deal’ Brexit jitters had dominated Pound performance in recent weeks, as fears that the UK could leave the EU without any kind of deal limited Sterling’s appeal even when solid UK data was published.

Signs that some officials still believed a deal was more likely than that worst case scenario ‘no deal’ outcome generally made the Pound more appealing though, encouraging some investors to buy the British currency back from its cheapest levels.

Sterling was also supported by Tuesday’s UK public sector net borrowing surplus, which was the best July borrowing surplus for 18 years.

Still, the Pound may have strengthened even more versus the weak Australian Dollar if not for persistent Brexit jitters. As the UK government showed its plans for how a ‘no deal’ Brexit could unfold, ‘no deal’ Brexit fears were rekindled.

Analysts are hoping though, that the report will put more pressure on the EU side of negotiations to make sure that a UK-EU deal is reached. According to Simon Morris, financial services lawyer at CMS:

‘The stark fact is that there can be no continuity without EU reciprocity. Mutual interest may point to some deal, but the EU holds all the cards,’

AUD Tumbles as Australian Political Turbulence Fails to Settle

Numerous factors, both at home and abroad, have left the Australian Dollar highly unappealing this week.

Despite broad weakness in the US Dollar (USD), the Australian Dollar was unable to capitalise as investors remained concerned that US-China trade jitters would persist instead of lightening.

The latest round of US-China trade talks have been perceived as being not high level enough to improve trade relations, and US President Donald Trump has also indicated he does not expect relations to improve soon.

As Australia has strong trade ties to both the US and China, these persistent trade spats between the US and China have weighed heavily on the Australian Dollar’s appeal.

However, the latest Australian political developments have also prompted investors to sell the Australian Dollar this week.

With Australian Prime Minister Malcolm Turnbull looking to potentially face a second leadership challenge within days, investors are anxious about the stability of Australia’s government.

According to Alan Joyce, CEO of Qantas:

‘For everybody in the country what is happening in Canberra is disappointing and frustrating. Business likes certainty and confidence in what happens in the future. Anytime we see uncertainty like what is happening in Canberra it is not helpful,’

Australian Dollar weakness is likely to persist until political uncertainties cool, but some analysts believe things could get worse before they get better.

Lastly, AUD is feeling pressure from Australian inflation uncertainty as the Reserve Bank of Australia (RBA) has indicated it would like more clarity in the inflation outlook.

GBP/AUD Forecast: Brexit and Australian Politics in Focus

Ultimately, this week’s UK and Australian data has had little impact on the Pound to Australian Dollar exchange rate as investors have once again become focused on political issues.

For Pound investors, the biggest influence currently is Brexit developments once again. Any further developments in Brexit are most likely to cause late-week movement in Sterling, or drive the British currency next week.

In particular, Pound bulls will be looking for signs that UK and EU negotiations are becoming more optimistic about the chances of a UK-EU Brexit deal being reached in the coming months.

If hopes for a Brexit deal rise among officials, this could cause ‘no deal’ Brexit fears to lighten in markets and the Pound would become more appealing.

Australian Dollar investors are likely to focus on developments in Australian politics, as well as US-China trade tensions. If any of these situations improve, the Australian Dollar could recover some of its recent losses.

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TAGS: Pound Australian Dollar Forecasts