Brexit Priced-in, GBP/AUD Risk Turns To BoE Interest Rate Decision

Brexit Priced-in, GBP/AUD Risk Turns To BoE Interest Rate Decision

The Pound to Australian dollar exchange rates began last week relatively subdued, with GBPAUD trading around $1.88 after the risk-sensitive ‘Aussie’ continued to benefit from the previous week’s signing of the ‘phase one’ US-China trade deal.

However, rising criticism of the Washington-Beijing deal began to weigh on market appetite for the risk-correlated Australian Dollar, with concerns that the two superpowers were once again set on a collision course.

Chad Brown, a Senior Fellow at the Peterson Institute for International Economics, commented:

‘That’s a giant hole in the Phase One deal, and there’s no way to get around it, we’re no closer today to resolving any of those fundamental frictions than we were before the trade war started’.

Tuesday evening’s release of January’s Australian Westpac consumer confidence report also weakened the AUD/GBP exchange rate, with Westpac’s Chief Economist Bill Evans citing the Australian bushfires as a cause for deteriorating sentiment amongst buyers.

The Australian Dollar (AUD) rose against GBP on Thursday, however, after December’s Australian unemployment rate report fell to a better-than-expected 5.1%, ending 2019 on a positive note.

Gareth Aird, an Economist at CBA, was balanced in his analysis, commenting:

‘The unemployment rate is now on a very gentle downward trend despite GDP growth running well below trend. Unemployment usually rises when the economy is running below trend. Bottom line, we have removed the February [Reserve Bank of Australia] rate cut in our forecasts and pushed it back to April.’

Some of the ‘Aussie’s gains were, however, held back by lingering doubts over the longevity of the newly-signed ‘phase one’ US-China trade deal.

With further geopolitical uncertainty being on the horizon, however, the GBP/AUD exchange rate closed the weak on a steady note trading around AU$1.914.

Pound Exchange Rates Steady on Positive UK Services PMI

The Pound (GBP) was plagued by rising odds over a Bank of England (BoE) rate cut last week, leaving many Sterling traders concerned that the UK economy could start off to a bad start in 2020.

Also, with the fast-approaching 31st January Brexit date, UK markets remained on the defensive as increasing evidence of a possible hard Brexit this year weakened the Pound.

This followed comments from Chancellor Sajid Javid, who said that the British government were looking to diverge with EU regulations, a prospect that left many investors concerned that the UK could face a no-deal towards the end of this year.

Mr Javid went on to reassure UK markets, however, saying that the nation’s manufacturing sector would not suffer under an agreement with the EU. He said:

‘We look forward with confidence as we strike that new free trade agreement with our European friends, as we strike new free trade agreements across the world, it will be a very important time for British business. And I can see a British economy that continues to go from strength to strength.’.

The GBP/AUD exchange rate remained steady on Friday, however, despite a better-than-expected UK Markit Services PMI, which rose from 50 to 52.9.

Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, commented:

‘2020 has started on a positive note with this sudden change in momentum. However, that’s where the story will end until this uncorked trickle of new orders and activity turns into a flood for businesses hit by hesitancy in the last three years. Business activity will need to be buoyed up by the prospect of strong negotiations around the UK’s exit from the EU to return them to strength in the years to come.’

Looking Ahead for Australian Dollar Exchange Rates

Australian Dollar (AUD) investors will be looking ahead to this Tuesday’s release of December’s Australian Westpac Leading Index report. Any further signs of a bright year ahead for Australia’s economy would boost the AUD/GBP exchange rate.

Looking ahead to Wednesday, the Reserve Bank of Australia’s (RBA) inflation data, however, could give a better indication of where Australia’s economy is heading. An uptick in the Australian CPI data, therefore, would prove AUD-positive.

Currency and commodity markets remain relatively sensitive to the new global health risk – the Chinese conoravirus.

“We remain relatively calm, though. Neither around the outbreak of SARS, nor around the outbreak of Swine -or Birdflu, did Copper prices fall of a cliff. Hang Seng (and local Chinese markets) were hit by the SARS-outbreak, but it proved short-lived as the virus was contained within roughly half a year. Global contagion effects were limited, and they should also be so this time around, even if the Corona virus has been spreading slightly faster than SARS.

“Accordingly, the AUD also weathered the storm and even rose after a while post the SARS-outbreak. Even if we remain upbeat on AUD vs. NZD (and GBP), it may make sense to remove a few chips from the table given the risk of a surprisingly large escalation of the Corona virus. GBP could be hit (again) if the BoE ends up cutting this week. Risk/reward is now decent on betting on a BoE cut again from a “no smoke without fire” perspective.”

Chart showing how AUD weathered the storm around SARS, Swine- and Birdflu outbreaks – Source: Nordea

Pound Sterling traders will be awaiting Thursday’s Bank of England interest rate decision, which is expected to hold at 0.75%. However, since rate cut odds have risen over the course of last week, any signs that the BoE could take a dovish stance on policy would weaken the GBP/AUD exchange rate.

Brexit will also remain firmly in focus this week, with the UK due to leave the European on Friday. Any signs of a post-Brexit problem over trade, with the UK and EU failing to provide any concrete agreement, would leave UK markets feeling jittery on the threat of a no-deal.

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