Pound Australian Dollar Exchange Rate Rallied after May Clarified Government Stance on Brexit

January 17, 2017 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate Rallied after May Clarified Government Stance on Brexit

On Wednesday afternoon, the Pound to Australian Dollar exchange rate trended in the region of 1.6295. The pair was on track to have lost around -0.7% throughout the day as Sterling was sold from its Tuesday highs in profit-taking.

The Pound selloff was highly influential as the British currency fell across the board despite lower risk-sentiment keeping the Australian Dollar weaker than it had been thus far this week.

[Previously Updated 17/01/2017]

Confidence in the Pound (GBP) was boosted dramatically on Tuesday, in part thanks to stronger-than-expected inflation data and a greater sense of clarity over the government’s Brexit plan.

GBP AUD Exchange Rate Surged on Government Clarity over Brexit Plans

Sterling slumped sharply on Monday in response to speculation that the government was not seeking to maintain its access to the single market or any other ‘bits’ of its EU membership, dented by worries over the implications of a hard Brexit.

However, when Theresa May confirmed that continued membership of the single market is not an aim of negotiations this failed to exacerbate the recent weakness of the Pound, which continued to rally strongly.

Markets were encouraged by the greater element of clarity that May’s speech provided, particularly as a parliamentary vote on the final deal was confirmed.

This added to the optimistic mood that had greeted December’s higher-than-expected Consumer Price Index, with investors speculating that a more rapid increase in inflation could encourage the Bank of England (BoE) to raise interest rates sooner rather than later.

As a result the Pound Australian Dollar (GBP AUD) exchange rate surged higher, rising 1.78% on the opening.

Dip in Australian Confidence Index Hampered ‘Aussie’ Demand

Although Australian home loans showed a solid rebound in November, strengthening from -0.6% to 0.9%, this failed to encourage greater confidence in the Australian Dollar (AUD).

Investors were disappointed by a modest dip in the ANZ Roy Morgan weekly consumer confidence index, which limited the ‘Aussie’s ability to benefit from the weakness of the US Dollar (USD).

As expectations are not overly positive for Thursday’s raft of Australian labour market data demand for the antipodean currency is likely to remain limited in the near term, with the prospect of further Reserve Bank of Australia (RBA) policy easing still hanging over the currency.

Even if risk appetite remains heightened ahead of Donald Trump’s inauguration, the GBP AUD exchange rate may still maintain its uptrend thanks to the resurgent strength of Sterling.

Brexit Optimism Could Maintain Pound Sterling Upside

The bullish mood towards the Pound could persist over the coming days, particularly if the wider trend of risk appetite is maintained.

Wednesday’s raft of UK employment and wage data could offer additional support to Sterling, assuming that wage growth is found to have edged higher in the three months to November.

If signs point towards a smoother path to Brexit, the GBP AUD exchange rate could remain strong, as Lee Hardman, currency analyst at MUFG, noted:

‘We continue to believe that the bulk of the adjustment lower for the Pound in response to Brexit concerns has already taken place which leaves the Pound undervalued. The main downside risk for the Pound going forward is that the negotiations between the UK and EU could break down thereby increasing the likelihood of a more disorderly Brexit. However, we doubt that talks could break down as early as this year.’

Political developments in the UK and the US are nevertheless likely to remain major drivers of the GBP AUD exchange rate in the near future.

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