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Outlook for the GBP AUD Exchange Rate: Pound Sterling Sell-off as Foreign Exchange Markets Cool

September 18, 2017 - Written by Ben Hughes

The pound to Australian dollar exchange rate has fallen back from last week's best conversion levels as sterling was sold-off across the markets.

Amid a lack of demand for risk-correlated currencies, GBP/AUD easily surged last week as investors digested an unexpectedly hawkish tone from the Bank of England (BoE).

The ‘Aussie’ has also been limp due to a cautious Reserve Bank of Australia (RBA).

The Australian Dollar’s recent weakness helped GBP/AUD to surge around six cents last week as it jumped from 1.6379 to 1.6977. The pair slipped on Monday, but remained above the level of 1.69.

GBP Sustains Gains after Huge Rally

The Bank of England’s (BoE) September policy decision was just what Pound trade needed to boost it from near its worst levels.

After the BoE meeting minutes indicated that the bank may need to adjust monetary policy sooner than markets expect, Sterling saw one of its strongest two-day advances in months.

Market bullishness about the bank’s meeting minutes only increased due to comments made by BoE Governor Mark Carney and policymaker Gertjan Vlieghe.

Carney stated on Thursday afternoon that most of the Monetary Policy Committee (MPC) including himself believe that monetary policy may need to be adjusted as soon as the coming months.

Vlieghe followed this with even more hawkish comments on Friday. He indicated that the UK interest rate may need to go even higher than it was before the August 2016 rate cut that followed the Brexit vote.

Investors seemingly took the hawkish shift in tone from bank officials as a signal that the bank could be planning to hike UK interest rates as soon as November.

Many analysts revised Pound forecasts following the news. On Monday, HSBC forecasts saw a major shift in tone.

HSBC no longer believes that UK interest rates will remain frozen throughout 2017 and 2018, instead predicting that there will be one UK rate hike in November and another in May 2018.

Despite the Pound outlook improving however, Sterling was sold from its highs on Monday.

Concerns that the rally may have been overdone, as well as anxiety about Friday’s upcoming Brexit speech from UK Prime Minister Theresa May, have made it difficult for the Pound to hold its best levels.

AUD Volatile on Mixed Risk-Sentiment

While Australia’s August employment report was largely impressive, the Australian Dollar was unable to sustain any notable advances due to risk-aversion in markets.

Last week saw US Dollar (USD) demand finally improve again, due to a surprisingly strong US inflation report. Strong US inflation led to a jump in December Federal Reserve interest rate hike bets.

This, as well as renewed geopolitical tensions between the US and North Korea, have left markets more risk-averse.

Forecasts that prices of iron ore, Australia’s most lucrative commodity, could continue to fall have also weighed on the commodity-correlated ‘Aussie’.

Lastly, Australian Dollar traders are increasingly disappointed with the cautious tone of the Reserve Bank of Australia (RBA), especially with many other major central banks taking more hawkish tones in recent months.

Pound to Australian Dollar Exchange Rate Forecast: Could the RBA be Unexpectedly Hawkish?

The Australian Dollar is unlikely to see a strong recovery against the Pound in the coming days, unless the Reserve Bank of Australia’s (RBA) upcoming meeting minutes take a surprisingly hawkish shift.

Markets widely expect the RBA minutes report to be familiarly cautious since the bank’s meeting earlier in the month saw no notable shift in tone.

If the RBA minutes are largely a repeat of the bank’s recently cautious tone, the Australian Dollar will remain limp and GBP/AUD movement will be driven largely by the Pound.

However, ‘Aussie’ demand may also improve slightly if risk-sentiment improves. If Fed rate hike bets slip or if geopolitical jitters cool, risky investments could become more appealing again.

Overall though, GBP/AUD investors are most likely to focus on Britain’s August retail sales and an upcoming Brexit speech from UK Prime Minister Theresa May.

If UK retail sales disappoint or May’s Brexit speech hints at a hard Brexit, Sterling could slip further from its recent highs.
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