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Australian Dollar (AUD) Forecast to Rise on GBP if US Economic Upsets come from Yellen Comments

April 6, 2016 - Written by Frank Davies

While the Pound is currently strong against the Australian Dollar, this may be undone by US Dollar movement in the near-future. If the 'Buck' crashed on the night's comments from Fed Chair Janet Yellen, the 'Aussie' may be able to rise unchecked against the British Pound.

Pound Sterling could manage to advance against the Australian Dollar in the future, if China records any particularly unexpected losses in its economic development which would soften Australian economic prospects.

GBP Exchange Rate Supported by Services Growth

Best estimates suggest that around three quarters of the economic activity which takes place in the UK happens in the tertiary sector, so yesterday morning’s domestic Purchasing Managers Index survey of the domestic services sector was keenly monitored by investors. The outcome of the March survey slightly bettered market participants’ expectations, showing at 53.7 versus an anticipated 53.5 – up from February’s counterpart number of 52.7. However, commentators were far from convinced by the release; Chis Williamson, Chief Economist at Markit, observed that,

‘An upturn in the pace of service sector growth in March was insufficient to prevent the PMI surveys from collectively indicating a slowdown in economic growth in the first quarter. The surveys point to a 0.4% increase in GDP, down from 0.6% in the closing quarter of last year.’

Williamson went on to note that, ‘across the three main sectors of the economy, firms reported the smallest increase in demand for just over three years, which in turn fed through to a reluctance to take on new staff. March saw the weakest rate of job creation for over two-and-a-half years.’

For reasons outlined by Williamson, the statistics caused a downward move for the Pound Sterling (currency : GBP) on the day – a development which sent the Pound euro exchange rate down to a fresh near-term low in the 1.2400s.

RBA Held the Cash Rate but AUD Exchange Rates Weakened

The Aussie was hit by comments from RBA Governor Glenn Stevens which accompanied the decision. Stevens’ assertion that, ‘the Australian Dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role… under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.’

These words were taken as a veiled announcement that the RBA will seek to actively weaken its local currency. The forecast for the Aussie is now therefore neutral to negative.

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