Due to mixed risk-sentiment and Brexit uncertainties, the British Pound to Australian Dollar (GBP/AUD) exchange rate has been volatile this week. On Thursday, strong UK retail sales results helped the Pound to rebound from its weekly lows and recover around half of its losses since Monday.
After opening this week at the level of 1.8267, GBP/AUD briefly jumped to touch a four month high of 1.8396. The Australian Dollar then rebounded from its worst levels in profit taking and pushed GBP/AUD to touch a fortnight low of 1.8080 on Wednesday. At the time of writing on Thursday, GBP/AUD was trending in the region of 1.8190.
GBP Climbs on UK Retail Sales Report despite Brexit Uncertainties
Market demand for the Pound was dampened on Wednesday, amid reports that UK Prime Minister Theresa May would reject the EU’s offers at improving plans for how to handle the issue of Ireland’s border post-Brexit.
Following PM May’s speech at a dinner on Wednesday night, EU leaders indicated they believed that there had been no progress on Ireland’s border and that the topic remained deadlocked.
However, as the EU leaders May spoke to last night are not directly involved in Brexit negotiations, investors remained hopeful that actual Brexit negotiations would continue to accelerate, even if disagreements remained on key issues like the Irish border.
Ultimately, ‘no-deal Brexit’ fears remain fairly muted this week. Investors brushed over the latest Brexit jitters on Thursday, as Britain’s August retail sales results printed well above market expectations.
Retail sales were forecast to have fallen from 0.7% to a contraction of -0.2% month-on-month, but instead only slowed from a revised 0.9% to 0.3%.
The yearly figure was even more impressive. Rather than falling from 3.8% to 2.3% as forecast, the figure only slipped from a revised 3.8% to a still impressive 3.3%.
The surprisingly strong retail sales figures were due to the weather staying warmer for longer in 2018, as well as higher household spending due to England’s performance in the 2018 World Cup.
However, some analysts think the outlook is a little gloomy, as UK in
flation rises again and puts a squeeze on wages. According to Josie Dent, Economist at CEBR:
‘While today’s headline figure paints a rosy picture for retail, more timely indicators show that the high street is struggling this month.
John Lewis Partnership figures for last week show that the total value of sales was 2.2% lower than the same week a year ago, while for their financial year-to-date, sales are down 0.5% on the same time period last year.’
AUD Continues to Benefit from Higher Risk Sentiment
Despite this week’s news that the US and China had ramped up trade tariffs against one another as feared, investors have been less hesitant to buy risky trade-correlated currencies like the Australian Dollar.
Both the US and China’s latest trade tariff plans were less severe than the nations had previously indicated.
Analysts believed the softer than expected escalation could point to willingness from the nations to enter new trade talks rather than continuing to worsen trade tensions.
Hopes that the US and China could enter new trade negotiations made trade-correlated currencies more appealing and weakened demand for safe havens.
This has been the primary cause of Australian Dollar strength this week.
According to Steven Dooley from Western Union Business Solutions, markets were also relieved by China’s promise that it wouldn’t devalue the Chinese Yuan (CNY):
‘Yesterday, Chinese Premier Li Keqiang said the country wouldn’t devalue the yuan to make its exports more competitive in a sign China would resist further escalation,
The news boosted markets around the region with the AUD higher.’
Thursday’s Reserve Bank of Australia (RBA) bulletin had little impact on the Australian Dollar’s strength.
GBP/AUD Forecast: Potential Brexit Developments Could Drive Late-Week Movement
So far, the Pound to Australian Dollar exchange rate is on track to end the week lower amid Brexit uncertainties and higher demand for risky trade-correlated currencies like the Australian Dollar.
However, if there are notable developments in UK-EU Brexit negotiations before markets close for the week, the Pound could still be in for a recovery.
For much of the week, investors have been hoping that UK or EU negotiators could soften stances or come up with an alternative solution regarding Ireland’s border issue.
If there are any signs of progress on an agreement regarding the Irish border as a result of the EU summit before the end of the week, the Pound could see a surge in demand as soft Brexit hopes would rise.
On the other hand though, a lack of Brexit developments from the EU summit could make investors more anxious about the possibility of a ‘no-deal Brexit’, which could leave GBP/AUD weaker.
The Australian Dollar is likely to remain vulnerable to potential US-China trade developments over the coming sessions.
Friday’s UK public sector net borrowing report is unlikely to be particularly influential. Instead, Pound to Australian Dollar (GBP/AUD) exchange rate investors awaiting UK and Australian data will await next week’s UK growth data and Australia’s private sector credit figures.
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