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Investors Forecast that Australian Dollar AUD has Topped Out Against Pound Sterling

May 8, 2015 - Written by John Cameron

British investors’ focus may have been firmly on today’s UK General Election results but that didn’t stop yesterday’s session delivering plenty of price action for the world’s major currency pairs.

The Australian Dollar (currency:AUD) was the first out of the blocks, following the publication of labour market data in the Land Downunder. Analysts had been expecting the official numbers to reveal that some 4,000 new positions had been generated in the domestic economy last month, so the result, which revealed an unexpected drop of 2,900, came as a shock to market participants. The outcome provides further evidence that activity in the Aussie economy is cooling and provides further vindication for the Reserve Bank of Australia’s early-week decision to cut its key lending rate to a fresh all-time low of 2.00%. The news sent the Pound Sterling Australian Dollar exchange rate up from an early low of 1.9053 to touch 1.9319 GBP AUD just after the New York equities close.

Meanwhile, the generalised sell-off in global equities continued on the session, with London’s FTSE 100 closing down by 0.67%. The shift out of risk was particularly evident in emerging market exchanges, with China’s shares one again being hit hard and India recording another session of pronounced losses. The downward move for shares has coincided with a pronounced sell-off in the world’s bond markets. Prices of government debt have taken a heavy hit since the weekend and yields, which move inversely to gilts’ asking price, have shot up. The move suggests that investors believe that fears regarding the potential perils of deflation pose to the global economic recovery. The price of a barrel of Brent Crude oil breached the $68 barrier during the middle part of the trading day – the price of a barrel of ‘Black Gold’ had been lodged in the $40s as recently as the early part of January. The rise in oil prices has caused inflationary expectations to increase and the upshot may add fuel to the selling pressure on the Australian Dollar. The RBA’s decision to significantly reduce its relative yield advantage against the major economies of the Western World may look severely out of step if the Bank of England and the US Federal Reserve raise interest rates during coming months.

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