GBP AUD Exchange Rate Softens Despite Risk Aversion

April 6, 2017 - Written by James Fuller

STORY LINK GBP AUD Exchange Rate Softens Despite Risk Aversion

The British Pound to Australian Dollar exchange rate slipped slightly from its weekly highs throughout Friday’s session due to underwhelming UK ecostats, but still looked to end the week above its opening levels.

Risk-averse behaviour in forex trade remained high throughout the week, and disappointing price movement in the iron ore market kept the iron ore correlated ‘Aussie’ in low demand.

[Previously updated 07/04/2017]

March’s Australian construction PMI showed a loss of momentum within the sector, putting fresh pressure on the ‘Aussie’ as risk appetite remained limited.

However, the Pound also softened in response to a widening of the UK trade deficit, with the health of the domestic economy increasingly in question even before formal Brexit negotiations get underway.

[Previously updated 06/04/2017]

Risk appetite faltered in the wake of unexpectedly hawkish Federal Reserve meeting minutes, although this failed to shore up the Pound to Australian Dollar exchange rate.

GBP Trended Lower as Service PMI Boost Faded

Although March’s UK services PMI strongly bettered expectations, rising from 53.3 to 55.0, this was not enough to keep the Pound on a bullish trend.

With general sector growth remained robust signs continued to point towards mounting pressure on household finances as price pressures pick up.

As Brexit-based uncertainty seems set to persist for the foreseeable future there are concerns that the economy will come under greater pressure, prompting growth to slow as inflation rises.

If consumer spending – which has been the primary economic driving force in the wake of the EU referendum – slows then the Pound could suffer further softening, limiting its appeal in the near term.

Hawkish Fed Minutes Dented AUD Demand

Demand for the Australian Dollar weakened in response to the news that the Fed is already discussing plans to shrink its balance sheet.

This latest sign of tighter monetary policy in the US weighed heavily on the appeal of commodity-correlated currencies, particularly as doubts remain over the Trump administration’s ability to deliver on promised infrastructure investment.

A modestly weaker-than-forecast Chinese services PMI also limited the appeal of the risk-sensitive ‘Aussie’, raising further concerns over global demand for base metals.

Even so, as the antipodean currency had suffered greater downside pressure in the early week technical resistance helped to keep the GBP AUD exchange rate on a weaker footing.

GBP AUD Exchange Rate Forecast: BoE Dovishness to Weigh on GBP Outlook

Ahead of the weekend the Pound could experience further bearishness in response to commentary from Bank of England (BoE) Governor Mark Carney.

Markets anticipate a relatively dovish message from Carney, given that the BoE has repeatedly stated its intention to look through some degree of overshoot in its inflation target.

As researchers at Rabobank noted:

‘The MPC are acutely aware that “attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth”. We expect steady policy well into 2018 and potentially beyond. That said, we would expect the BoE to step up hawkish commentary to control any further bout of weakness in the Pound.’

If Carney reaffirms the BoE’s neutral policy bias then the GBP AUD exchange rate could be prompted to trend lower, particularly if the latest UK trade and production data proves disappointing.

However, if the Australian construction PMI for March shows that the sector lost momentum at the end of the first quarter this could encourage fresh selling of the ‘Aussie’.

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TAGS: Pound Australian Dollar Forecasts