Despite Bank of England (BoE) interest rate cut bets continuing to rise in reaction to the latest UK data and general market optimism over recent geopolitical developments, the British Pound to Australian Dollar (GBP/AUD) exchange rate is advancing again today. The Australian Dollar is tumbling amid market disappointment that the US-China ‘phase one’ trade deal would not leave all US tariffs undone, and this is keeping investors anxious about trade relations.
Following last week’s highly volatile GBP/AUD movement, the pair remains jittery this week though its movements have been comparatively more limited.
GBP/AUD opened this week at the level of 1.8930 and tumbled as soon as markets opened on Monday, due to a rise in Bank of England interest rate cut bets.
Yesterday, GBP/AUD touched on a January low of 1.8774 before rebounding from lows. Today, GBP/AUD continued to climb due to broad weakness in the Australian Dollar, and at the time of writing the pair was trending closer to the level of 1.8890.
GBP Exchange Rates Avoid Losses despite Bank of England (BoE) Interest Rate Cut Bets
This week has been fairly bearish for the Pound so far. Even as the Australian Dollar’s weakness is broad and helping GBP/AUD to advance today, the Pound has been unable to recover all of Monday’s losses.
Investors are hesitant to buy the Pound too much as Bank of England (BoE) interest rate cut bets have been gradually rising all week.
Following Monday’s poor UK growth and production results, today showed that UK inflation had weakened to its lowest levels in three years. Monthly inflation slowed to a stagnant 0.0% month on month in December.
With price pressures weakening, Bank of England (BoE) interest rate cut bets to around 60%.
In fact, some analysts are warning that the Bank of England could become even more dovish than currently expected. According to Wouter Sturkenboom, Chief Investment Strategist for EMEA at Northern Trust Asset Management:
‘We expect two more rate cuts from the Bank of England,
Now that Brexit has been decided, they (BoE policymakers) finally have the political backdrop that allows them to respond to what they should have been responding to earlier in 2019, which is a weak growth and inflation environment.’
However, despite rising BoE interest rate cut bets and a generally broadly weak Pound, the Pound to Australian Dollar was able to hold its ground today due to weakness in the Australian Dollar.
AUD Exchange Rates Unappealing as US-China Trade Developments Put Spotlight on Lingering Uncertainties
The Australian Dollar has been among the most appealing major currencies in recent sessions, but its bullish streak is taking a pause for now.
Recovering market optimism over global geopolitics, such as US relations with Iran and China, made investors more willing to buy risk and trade correlated currencies like the Australian Dollar.
As Australia has close trade relations with China, this means the ‘Aussie’ is especially sensitive to Chinese trade developments.
However, this also meant that fresh concerns about the future of US-China trade relations weighed on the Australian Dollar today and left the currency weaker against major rivals like the Pound.
Analysts are anxious about news that the US would not be removing all its trade war tariffs on China, even as a ‘phase one’ trade deal is signed. This dampened market trade sentiment and weighed on AUD today.
According to Steven Dooley, APAC Currency Strategist at Western Union Business Solutions:
‘Of course, all focus tonight will be on the US-China trade deal,
The risk? With markets up strongly over the last three months on hopes for the deal any disappointment could see shares give back recent gains,
In this environment, the AUD might fall.’
GBP/AUD Exchange Rate Forecast: US-China Trade Deal in Focus
The US and China are set to hold a ceremony to formally sign a ‘phase one’ trade deal over the coming day. As the Australian Dollar is correlated to global trade and China’s economy, GBP/AUD may see notable movement from the news.
If there are any surprising developments in US-China relations, such as signs things are improving more than expected, market trade sentiment could rise and the Australian Dollar could push GBP/AUD down again.
US-China trade developments are likely to overshadow tomorrow’s Australian home loans data for Australian Dollar investors, but the Pound will remain focused on UK data and Bank of England (BoE) interest rate cut bets.
Friday will see the publication of Britain’s December retail sales results. If UK retail sales fall short, BoE interest rate cut bets could rise and the Pound to Australian Dollar exchange rate would struggle more to recover Monday’s losses.
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