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Can the GBP AUD Exchange Rate Hold onto its Election Rally?

April 19, 2017 - Written by John Cameron

Although some of Sterling’s bullishness faded as markets adjusted to Theresa May’s surprise call for a snap general election the GBP AUD exchange rate remained on a stronger footing.

Investors are betting that the Conservatives will be able to secure an increased majority in a June election, limiting the parliamentary push-back against the Prime Minister’s Brexit plans.

Even so, if opposition parties lose some of their leverage this could equally lead to higher odds of a hard exit from the EU if Eurosceptic Tory backbenchers gain a louder voice.

While markets seem confident that there will not be a significant shift in political power at this juncture, however, a fresh surprise cannot be entirely ruled out.

If the government ends up weakening its position this could create renewed uncertainty for the UK economy and Brexit negotiations, leaving the Pound on a weaker footing across the board.

Despite a solid improvement in the Westpac leading index for March the mood towards the Australian Dollar remained muted during Wednesday’s European session.

The appeal of the ‘Aussie’ was limited by a weakening in the ANZ Roy Morgan weekly consumer confidence index, which undermined optimism in the outlook of the domestic economy.

Lower levels of consumer spending could hamper economic growth, particularly as Australia still looks to shift towards a greater focus on the service sector.

With the outlook for the Reserve Bank of Australia (RBA) still looking dovish the GBP AUD exchange rate has found further support.

Bill Evans, Chief Economist at Westpac, noted:

‘As discussed previously the Board is concerned about excessive household leverage which has been boosted by rising house prices. While this concern might be alleviated by a rate hike the real economy is in no shape to deal with higher rates.’

Although the GBP AUD exchange rate is likely to remain vulnerable to any political developments in coming days the pairing is expected to hold onto some of its recent gains.

Unless the polls point towards an increase in support for Labour or the Liberal Democrats then Sterling could maintain a more bullish outlook.

Nevertheless, volatility could be in store if Friday’s UK retail sales data proves disappointing.

Any signs that consumer spending is faltering could give investors reason to sell out of the Pound, given that much of the economy’s resilience in the wake of the Brexit vote has been the result of strong sales activity.

However, if sales are not found to have contracted on the month as forecast this could encourage greater confidence in the current health of the UK economy and support further GBP exchange rate strength.

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