Pound Australian Dollar (GBP/AUD) Exchange Rate Slides as Fears of Hard Brexit Scenario Pick up

January 28, 2020 – Written by Frank Davies

Fears of Hard Brexit Scenario Weigh Heavily on Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate

Fresh market anxiety over Brexit saw the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate slip on Tuesday.

Comments from the BDI, a key German industry association, reignited jitters over the prospect of a potential hard Brexit scenario, leaving the Pound on the back foot.

As the BDI warned that a comprehensive free trade agreement is impossible for the UK and EU to agree by the end of the year the mood of investors naturally soured.

Support for the Pound also weakened in response to the latest CBI reported retail sales index, which showed a second consecutive month of flatness.

Market Worries over Impact of Coronavirus Outbreak Limit Australian Dollar Upside

Even so, the Australian Dollar struggled to capitalise on the relative weakness of its rival thanks to an increased atmosphere of market risk aversion.

The continuing spread of the Wuhan coronavirus left investors with little cause for confidence as fears of a further slowdown in global growth mounted.

Both iron ore and copper prices came under pressure thanks to bets that the outbreak will knock a few percentage points off Chinese growth in the coming quarters.

With Chinese demand for base metals looking set to weaken the commodity-correlated Australian Dollar stumbled.

As the antipodean currency also commonly functions as a proxy for market sentiment towards the Chinese economy any potential for AUD exchange rate gains was distinctly limited.

Australian Dollar Looks for Boost on Solid Australian Inflation

However, the Australian Dollar could find some support on Wednesday morning if the fourth quarter consumer price index data proves positive.

Evidence of mounting inflationary pressure within the Australian economy may offer AUD exchange rates a rallying point as the odds of any future Reserve Bank of Australia (RBA) interest rate cut fall.

While the headline inflation rate is forecast to hold steady at 1.7% on the year an uptick in the monthly reading could still help to shore up the Australian Dollar.

On the other hand, any miss from the inflation data could encourage the GBP/AUD exchange rate to recover some of its lost ground in the short term.

Dovish BoE Meeting Forecast to Weigh on GBP Exchange Rates

Further weakness could be in store for GBP exchange rates on Thursday, however, in the wake of the Bank of England’s (BoE) first policy announcement of 2020.

While the odds of an imminent interest rate cut have fallen since the release of last week’s better-than-expected UK services PMI the risk of a cut lingers.

If policymakers opt to ease monetary policy this could see the Pound fall further out of favour with investors, in spite of existing expectations of a 2020 rate cut.

However, a decision to leave rates on hold for the time being may help to put a floor under the GBP/AUD exchange rate.

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TAGS: Pound Australian Dollar Forecasts