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GBP to AUD Exchange Rate Edges Higher as Markets Become Risk-Averse

August 9, 2017 - Written by Ben Hughes

A rise in market risk-aversion on Wednesday has helped the British Pound to Australian Dollar exchange rate to advance from its weekly lows, despite the latest Australian data falling short of market expectations.

After broad Pound weakness last week left GBP/AUD at the level of 1.6441, the pair touched on a low of 1.6396 yesterday. Since then though, the pair has recovered and at the time of writing trended near the level of 1.6477.

GBP Benefits from Market Risk-Aversion

Despite the Pound’s broad Brexit-based weakness since the EU referendum last year, markets still consider the British currency to be relatively safe compared to risk-correlated currencies like the Australian Dollar.

Geopolitical concerns have returned to headlines this week, as tensions rise between the US and North Korea amid rising military rhetoric.

With little else on the economic calendar this week, investors have been spooked by threats of military action from both the US and NK.

As a result of the latest geopolitical developments, investors have been selling risky currencies in favour of currencies that are comparatively safe, which has helped GBP/AUD to recover this week.

However, domestic British news has not given investors much reason to buy the Pound higher.

Brexit concerns persist, with markets now fully expecting some kind of UK-EU Brexit divorce bill. The UK government has denied reports that it will be paying a bill worth €40b.

Sterling has also been weak since last week’s Bank of England (BoE) policy decision, in which the bank cut its UK growth and wage growth forecasts for 2017 and 2018.

This worsened concerns that the bank was not likely to take a hawkish stance on monetary policy any time soon.

AUD Fluctuates as Risk-Sentiment Drops

The risky Australian Dollar saw mixed trade during Wednesday’s European session, as investors became risk-averse due to rising geopolitical tensions between the US and North Korea.

Demand for the ‘Aussie’ was also limited by Wednesday’s Australian ecostats, which were largely disappointing.

Westpac’s latest consumer confidence survey showed that confidence had slipped in August. The change in consumer confidence came in at -1.2%, with the index dropping from 96.6 to 95.5.

Australia’s June home loans report was worse than forecast, slumping from a revised 1.1% to 0.5%. The figure had been forecast to improve from 1% to 1.5%.

June’s investment lending for homes print improved from -1.4% to 1.6%, but this was unable to provide the weaker Australian Dollar with any notable support.

However, while Australian data disappointed and markets became risk-averse, investors were slightly encouraged by China’s July inflation results.

Chinese inflation improved to 0.1% in July. While this fell short of forecasts, it offset some market concerns of lasting deflation in China, which is Australia’s biggest trade partner.

GBP/AUD Forecast: UK Trade Results Ahead

Thursday will see the publication of this week’s only notable UK ecostats. As a result, the Pound to Australian Dollar exchange rate has the potential to be influenced.

Britain’s June trade deficit report will be published. Alongside this, June data for manufacturing production, industrial production and construction output will be published too.

If Britain’s trade deficit narrows more than forecast, it will bolster hopes that the low value of the Pound is making UK exports more appealing. This would lead to a boost in Sterling demand.

However, if Thursday’s UK data fails to impress, GBP/AUD is unlikely to sustain any meaningful gains throughout the week.

The only Australian data still due for publication this week will be August’s consumer inflation expectations survey, which comes in on Friday.

Besides that, AUD traders are more likely to continue reacting to potential shifts in geopolitical tensions. If tensions between the US and North Korea cool, the ‘Aussie’ could push GBP/AUD back towards the week’s lows again.

Next week will be a much more influential session for GBP/AUD trade, as Britain’s July inflation results and the Reserve Bank of Australia’s (RBA) latest meeting minutes will be published.
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