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Pound (GBP) Australian Dollar Exchange Rate (AUD) Weakens after Negative UK Q1 GDP

June 30, 2017 - Written by John Cameron

The Pound has pared a lot of its recent gains against the Australian Dollar after negative UK Q1 GDP figures and strong commodity prices drove the pairing apart.

Sterling Stumbles Following Negative GDP Print



Sterling spent yesterday riding a wave of interest rate hike speculation after a surprising turnaround in sentiment from Bank of England (BoE) Governor Mark Carney. This morning, however, the rally slowed, as the Office for National Statistics (ONS) released their Q1 GDP statistics to reveal that GDP growth was at 0.2% - far weaker than 2016’s Q4 result of 0.7%. In addition to the disappointing GDP data, the ONS showed that incomes are being squeezed by rising prices and flat wage growth, resulting in UK households saving less than ever recorded.

Darren Morgan, head of GDP at the ONS stated:

‘GDP growth for the first three months of 2017 remained unrevised at 0.2%. Growth was driven by business services and construction, partially offset by declines in some consumer-focused industries, such as retail sales and accommodation.’

Strong Commodities and a weak US Dollar drive the Australian Dollar Higher



Whilst Sterling stumbled, the Australian Dollar benefited from both bullish commodities and US Dollar weakness. The Bank of England, the Bank of Canada and the European Central Bank have all expressed hawkish sentiments, making their respective currencies more attractive and reducing demand for the US Dollar.

Iron ore prices reached an 8-week high yesterday trading at $62.90 per dry metric tonne and, in turn, lifting steel and raw materials – all commodities that favour the Australian Dollar. Zou Mingdong, the steel manager at Zhongcai Merchants Investment Group stated:

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‘High margins after the government effort to eliminate low-grade steel are enticing mills to produce more steel, which increases the need for iron ore’ (iron being required to make steel).

The Chinese PMI report as a whole confounded expectations that their economy would slowdown by printing higher than expected at 51.7%, from 51.2%. This jump boded well for the ‘Aussie’ Dollar, as China is Australia’s primary trading partner.

The yield gap between Australian and US government bonds is also a significant driver in the value of the ‘Aussie’ Dollar and this has risen over the past week to 30 basis points – driving the Australian Dollar higher.

UK PMI Data and RBA Decision to Drive GBP/AUD Movement



Next week will see the release of a lot of significant PMI data for the Pound. Monday’s Markit manufacturing PMI for June will then be followed by key services Tuesday and a composite print on Wednesday. The Key services print has the potential to be very influential for the Pound, as should it not meet expectations, Britain’s economy may be deemed weaker than previously expected and hawkish sentiment may reduce, causing traders to jump ship for other currencies.

For the Australian Dollar, next week will see the release of the AiG’s May building permits and June manufacturing PMI. On Tuesday, however, the Reserve Bank of Australia (RBA) will announce its policy decision – by far the most significant news for the AUD.

Should the RBA deem data regarding the jobs and housing markets as not having improved enough, they may become dovish, despite being increasingly hawkish as of late – this could hurt the Australian Dollar.

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