Earlier in the week, the British Pound to Australian Dollar (GBP/AUD) exchange rate surged on the latest Brexit developments. However, on Wednesday GBP/AUD lost most of those gains as risk-sentiment lightened and investors bought the relatively risky Australian Dollar back from its cheapest levels.
After opening this week at the level of 1.8175, GBP/AUD briefly surged and touched a high of 1.8361 on Tuesday. Notably, this was the best level in over four months – since April. On Wednesday, GBP/AUD slipped back down though, and at the time of writing on Thursday GBP/AUD was trending closely to the week’s opening levels again.
GBP Little Changed as Bank of England (BoE) Leaves UK Policy Frozen
Investors had little fresh reason to buy the Pound on Thursday, as while the Bank of England (BoE) policy decision had the potential to be highly influential the bank’s decision and tone were ultimately in line with market expectations.
As was widely expected, the bank voted unanimously to leave UK monetary policy frozen in its September policy decision.
The bank notably reflected the general cautiousness of economists lately, by warning that Brexit uncertainty is affecting UK businesses more. According to the minutes:
‘Most indicators of exports and investment intentions had held up in recent months, although there had been a sharp fall in the IHS Markit/CIPS goods export orders index in August.
Some respondents to that survey, and the associated equivalents for the service and construction sectors, had noted uncertainty around the UK’s withdrawal from the European Union.’
The BoE also expressed concerns about the possibility of a US-influenced global trade war. According to the meeting minutes, the bank is more concerned about the possible impact of a trade war than it was in August:
‘Recent announcements of further protectionist measures by the United States and China, if implemented, could have a somewhat more negative impact on global growth than was anticipated at the time of the August Report.’
This, as well as a warning from credit rating agency Moody’s that a possible ‘no-deal Brexit’ could cause a UK recession, weighed slightly on the Pound on Thursday. This prevented GBP/AUD from recouping any of the gains seen earlier in the week.
AUD Supported on Strong Australian Job Data and Domestic Outlook
The embattled Australian Dollar has finally seen some stronger support in recent sessions, as investors reacted to some strong Australian data and economic performance by buying the relatively risky currency from its cheapest levels.
On Thursday, the Australian Dollar found support in the form of Australia’s August job market report, which beat expectations in many prints and impressed Australian Dollar investors.
Australia’s unemployment rate remained at 5.3% as expected, even despite the participation rate’s unexpected climb from 65.6% to 65.7%.
The employment change figure beat the forecast 15k and jumped from -4.3k to 44k, while the full-time employment figure printed an impressive 33.7k.
According to Su-Lin Ong from RBC Capital Markets:
‘These were a beautiful set of numbers, but ample slack remains in the labour market,
Accordingly, we need persistent above trend growth and employment generation to continue to erode this slack,
The odds are this will happen, but only slowly, keeping the RBA firmly camped on the sidelines.’
On top of this, the Australian Dollar has also been supported by signs that the US could be seeking new trade negotiations with China.
As Australia has strong trade connections with both nations, hopes that an escalating US-China trade war could be avoided bolstered market demand for the relatively risky trade-correlated Australian Dollar.
GBP/AUD Forecast: Political Developments in Focus until Next Week
As there will be no notable UK or Australian data published on Friday, the Pound to Australian Dollar exchange rate will be influenced largely be developments in politics and geopolitics for the remainder of the week.
If there are no surprising developments regarding the Brexit process, or US trade protectionism, the Pound to Australian Dollar could be on track to end the week fairly closely to its opening levels.
The Pound has the potential to climb again though, if more progress is perceived in UK-EU Brexit negotiations. The Pound could fall instead if fears of a possible ‘no-deal Brexit’ hit headlines again.
The Australian Dollar, on the other hand, will react to developments about US trade stances. If the US seeks to hold new trade negotiations with China, the risky trade-correlated Australian Dollar may push GBP/AUD lower.
In terms of data, next Tuesday’s Reserve Bank of Australia (RBA) meeting minutes and Wednesday’s key UK inflation rate results could influence the Pound to Australian Dollar exchange rate next week.
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