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GBP/AUD Weakens as Risk Appetite Boosts AUD Demand

June 29, 2017 - Written by Minesh Chaudhari

The British Pound may be on largely solid form today, but demand for the Australian Dollar is stronger.

This has pushed the GBP/AUD exchange rate slightly below opening levels, even though markets remain exuberant following yesterday’s hawkish shift in tone from Bank of England (BoE) Governor Mark Carney.

GBP Continues to Rally on Carney’s Monetary Policy Comments

Yesterday, Mark Carney surprised markets with what seemed to be a shift in tone regarding his outlook on UK interest rates.

Carney had commented on the 20th that it was not the right time to raise interest rates, so investors were surprised yesterday when he stated that;

‘Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.’

Unsurprisingly, his comments were laden with conditions, with Carney noting that business investment, wages and labour costs need to continue firming in order to offset weaker consumption growth.

It is likely Carney is attempting to jawbone the Pound higher in order curb inflation without having to actually raise interest rates and saddle the UK economy with the side-effects.

This means that the GBP/AUD exchange rate’s ability to resist further depreciation could evaporate in the near term if investors begin to question the veracity of what the Governor has said.

Investors Chasing High Yields Pushes AUD up Versus Safer Currencies

Despite a lack of supportive domestic data, the Australian Dollar has been able to make firm gains today.

Continued weakness in the US Dollar is keeping demand for higher yielding commodity currencies firm, with USD remaining on the decline as markets struggle to believe that the Federal Reserve will hike interest rates again this year.

AUD is also being driven higher by a spike in iron ore markets, with spot prices continue to rise further.

Benchmark 62% fines have climbed 4.4% to US$62.33 - their highest level since the 22nd of May - which means total gains in the past two days alone have totalled 10%.

Lower grade ore prices have jumped 5.1%, with demand for iron driven by the brisk face of production in Chinese steel mills.

Experts aren’t expecting iron ore to recover from its one-year low struck in the middle of this month on a long-term basis, however.

ANZ Commodity Strategist Daniel Hynes explains;

‘Elevated steel mill margins and abundant spare capacity should provide the impetus for a short-term rally in iron ore prices.’

‘We’re not expecting to see a full-blown rally from here, but something in the low $60’s looks reasonable over the next few months.’

Will Disappointing US Developments See GBP Falling Further Against AUD?

There is no UK data left for release today, but tomorrow sees the release of the GfK consumer confidence survey results, as well as the Lloyds business barometer.

The consumer confidence survey is expected to show sentiment has worsened, with the index predicted to fall from -5 to -7.

This would not bode well for the second-quarter GDP outlook, with the economy having already slowed markedly in the first quarter as rising inflation and slowing wage growth saw households cutting back on their spending.

Following later, just after the morning session has begun, is the finalised first-quarter GDP, which is expected to confirm that economic growth did indeed fall to 0.2% during the first three months of the year, after accelerating to 0.7% at the end of 2016.

There could be significant volatility for the Australian Dollar ahead if today’s US data should print above forecast.

GDP figures for the first quarter are expected to hold at 1.2%, as was estimated previously, but an upside surprise could see the US Dollar strengthening, which would pressure the Australian Dollar lower.

However, with Federal Reserve official James Bullard set to speak on Monetary Policy in London this evening, there is potential for further dovish comments on the monetary policy outlook to create even more demand for AUD.

Tomorrow’s Australian private sector credit data will be overshadowed by overseas releases.

The Chinese manufacturing PMI and the US personal consumption expenditure figures will both have more of an impact upon AUD than Australian data.
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