Pound Australian Dollar Report : GBP/AUD Rate Refuses to Dip as Aussie Suffers Interest Rate Concerns

March 4, 2011 - Written by John Cameron

STORY LINK Pound Australian Dollar Report : GBP/AUD Rate Refuses to Dip as Aussie Suffers Interest Rate Concerns

With global share markets rallying on the day yesterday, other things being equal, analysts would normally expect the Australian Dollar to gain ground due to its role as a risk-sensitive, commodity-driven currency.

However, the Pound Australian Dollar exchange rate (GBP/AUD) is 1 GBP = 1.6035 AUD, only marginally better than the 1.61 level which represents the highest rate for the last couple of weeks.

The reason that the Australian Dollar picks up support when appetite for risk is buoyant is that Australian holdings offer relatively more return for investors due to Australia’s central bank interest rate of 4.75%. Yesterday’s comments from European Central Bank President Jean Claude Trichet contained heavy hints to the market that the ECB would be increasing interest rates at its next monetary policy meeting at the start of April.

With oil prices remaining high and dragging up other commodity prices, it is likely that an increase in the ECB’s key lending rate would encourage other central banks around the world to enter into a new rate-hiking cycle. This would have the effect of making Australia’s interest rates less attractive to investors, hurting the Australian Dollar.

Analysts believe that a series of better-than-anticipated economic data releases would be needed in Australia to allow the Australian central bank the leeway to raise interest rates.

With China remaining one of Australia’s major trading partners and Chinese policy-makers taking active steps to cool down their economy in order to control rising domestic prices, it is possible that Australia’s recovery may suffer a slow-down, causing downside risk for the Australian Dollar.

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TAGS: Australian Dollar Forecasts Pound Australian Dollar Forecasts