GBP to AUD Exchange Rate Avoids Worst Levels despite Brexit Fears Amid Risk-Aversion

October 23, 2018 – Written by Tim Boyer

The Australian Dollar’s recovery rally against the Pound has seemingly paused for now, despite broad weakness in Sterling, due to lingering risk-aversion in global markets. The British Pound to Australian Dollar has been able to avoid its worst levels as a result of mixed Australian Dollar demand.

Last week’s Australian Dollar rally saw GBP/AUD pushed from the level of 1.8484 to 1.8345, and the pair has continued to edge lower this week so far. On Monday, GBP/AUD briefly touched on a low of 1.8256, but at the time of writing today the pair trended closer to the level of 1.833 again.

GBP Strength Limp as UK Investor Morale Plunges on Brexit Imminence

The reality of the Brexit process is still sinking in for many investors, particularly as the formal Brexit date in early 2019 approaches with no solid UK-EU Brexit deal agreed on yet.

Hopes that the UK and EU could agree to a close post-Brexit deal have lightened recently, replaced by fear and concern that a bad deal may be reached, or a good deal may face too many obstacles domestically.

This week so far, Northern Ireland’s DUP Party has said it would block an EU backstop proposal for the issue of Ireland’s border.

As the DUP is an ally of UK Prime Minister Theresa May’s Conservative government, this news was another blow to May’s Brexit plan and there is still no deal in sight on the issue of Ireland’s border.

Then on Tuesday, critics from Britain’s opposition Labour Party also indicated they may be forced to vote down parts of May’s Brexit plan.

According to financial services firm Hargraves Lansdown, UK investor morale has slumped to its worst levels in over 23 years – even lower than it was during the 2008 financial crisis. Laith Khalaf from Hargreaves Lansdown said:

‘Investors are in grim mood, as time is running out on Brexit negotiations with little progress on show. Sentiment was dented by the financial crisis, but not to the extent we are seeing today.

That’s perhaps because the crisis unfolded in an unscheduled fashion, while the timeline on the UK’s withdrawal from the EU is there for all to see. A looming early Budget and a stormy October on the markets will do little to settle nerves.’

Analysts still expect that the Pound’s potential for strength is limited until some more certainty is provided on the final Brexit deal. Economists are anticipating sudden sharp movements from the Pound when a Brexit deal is either finalised or falls through.

AUD Fails to Advance as Investors Avoid Risks

Global market gloom about the Brexit process and UK outlook isn’t just dampening the Pound though, as investor aversion to risk this week has dampened demand for the relatively risky trade-correlated Australian Dollar.

The Australian Dollar is often weaker in times of global risk-aversion, as investors will sell currencies correlated strongly to commodities or other risky assets in favour of safe haven currencies like the US Dollar (USD).

As well as UK political jitters, investors are also hesitant to take risks due to tensions between Italy and the EU, as well as concerns that Australia’s government will become a minority government.

GBP/AUD Forecast: Political Developments and Risk-Sentiment in Focus

Amid a lack of major UK or Australian data due for publication in the coming days, the Pound to Australian Dollar exchange rate is more likely to react to political developments and changes in risk-sentiment.

The Pound is unlikely to see much of a sustained rise in demand any time soon unless there is some kind of major development in Brexit negotiations, like an agreement on a significant chunk of a deal or a full deal itself.

Even this afternoon’s speech from Bank of England (BoE) Governor Mark Carney is unlikely to be hugely influential.

However, if Brexit fears continue to worsen the Pound could still slide lower.

The Pound to Australian Dollar exchange rate’s trajectory could still shift in response to risk-sentiment too.

For example, if investors become more eager to buy safe haven currencies, GBP/AUD will rise. On the other hand, if investors become more eager to take risks again GBP/AUD may near its lowest levels again.

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TAGS: Pound Australian Dollar Forecasts