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Pound Australian Dollar Exchange Rate Forecast to Strengthen Further on Neutral RBA Outlook

July 31, 2017 - Written by Frank Davies

Even though UK consumer credit rose to more than 200 billion in June the Pound Australian Dollar exchange rate remained on a bullish run.

While this marked the highest level of unsecured consumer credit since the 2008 financial crisis investors continued to favour the Pound throughout Monday’s European session.

In part this was thanks to comments from Chancellor of the Exchequer Philip Hammond, who rowed back on previous comments that had suggested the UK was in danger of being turned into a tax haven.

This offered some cause for confidence, even though the government message on the matter of Brexit remains mixed at best.

However, as the Bank of England (BoE) has previously highlighted the increasing household reliance on credit as a particular worry the Pound may struggle to hold onto its bullish form for long.

Pound Forecast to Weaken in Anticipation of BoE Policy Decision

Markets expect the BoE to leave interest rates unchanged on Thursday, although investors are keen to get a fresh gauge of the opinion split amongst the members of the Monetary Policy Committee (MPC).

If policymakers are seen to be shifting towards a more hawkish outlook on monetary policy this could encourage the GBP AUD exchange rate to trend sharply higher, with any hints of hawkishness likely to boost bets on the possibility of a 2017 interest rate hike.

Even so, Sterling could soften if the majority of the MPC continues to indicate an intention to leave policy unchanged for the foreseeable future.

However, as Viraj Patel, Foreign Exchange Stategist at ING, noted:

‘While some of the recent hawkish sentiment may fade as a result of the Bank showing little appetite for a policy change, we suspect that only a formal ruling out of a 2017 rate hike by Governor Carney - if explicitly asked in the post-meeting press conference - would have a sustained negative impact on GBP. We see this as highly unlikely given that BoE officials will probably want to keep all policy options on the table.’

The latest quarterly Inflation Report will also be in focus, with any change to the BoE’s forecasts likely to provoke further volatility for GBP exchange rates.

Any signs that policymakers hold a more optimistic view of the domestic economy could see the Pound strengthen markedly, even if the balance of the MPC remains tilted in the favour of the doves.

Risk Aversion Limits AUD Strength Ahead of RBA Meeting

Demand for the Australian Dollar has been generally diminished by rising geopolitical tensions, meanwhile, with developments in Venezuela and North Korea weighing heavily on market sentiment.

‘Aussie’ strength is likely to remain limited ahead of the Reserve Bank of Australia’s (RBA) August policy meeting.

With the central bank expected to maintain its neutral policy outlook at this juncture the Australian Dollar may struggle to find any particular support on Tuesday.

However, if the accompanying statement offers any signs of hawkishness this could put the GBP AUD exchange rate under renewed pressure.

Nevertheless, as analysts at Westpac noted:

‘It seems likely that the “commentary” on the AUD in the Governor’s Statement will be stronger than we have seen recently but we cannot be sure that a new “terminology” will be adopted. Be clear that even though the move in the AUD is associated with higher commodity prices, the RBA is uncomfortable.’

On the other hand, if the RBA strikes a dovish tone the Australian Dollar could extend its recent losses further as the prospect of any return to a monetary tightening bias diminishes.

Unless risk appetite sees a significant resurgence and global tensions ease somewhat the upside potential of the ‘Aussie’ will remain limited, to the benefit of the GBP AUD exchange rate.

Strong US data could also weigh heavily on the antipodean currency in the coming days, with markets still speculating over the possibility of the Federal Reserve raising interest rates again before the end of the year.

Any disappointing US figures could help to shore up the Australian Dollar, though, particularly if confidence in the abilities of the Trump administration weakens further.
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