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GBP/AUD Sheds Morning Gains after BCC Report Sours BoE Hike Bets

October 13, 2017 - Written by Tim Boyer

The British Pound has been fluctuating against the Australian Dollar today thanks to a fast-paced series of domestic developments that have seen traders re-evaluating the outlook on Brexit, the economy and monetary policy.

The GBP/AUD exchange rate was trading around opening levels of 1.6953 at the time of writing.

GBP Starts Day Strongly on Brexit Transition Deal Rumours

The Pound initially started the day on the rebound, after a German newspaper reported that the EU was preparing to offer the UK a two-year transitional exit deal, complete with access to the single market and customs union, provided the UK settled its divorce bill.

While not news as such, markets reacted surprisingly strongly to the suggestion, driving the Pound higher.

But a report from the British Chambers of Commerce (BCC) has seen Sterling surrender the day’s gains so far, after suggesting the outlook for the economy isn’t particularly rosy.

The results from the BCC’s latest Quarterly Economic Survey indicate that business investment and wage pressures remain sluggish – somewhat undermining confidence in the Bank of England’s (BoE) belief that these will rise sharply next year.

This undermined market hopes of a near-term interest rate hike, with the BCC claiming it was ‘extraordinary’ that the BoE was considering tighter monetary policy.

Dr Adam Marshall, the BCC Director General, said;

‘The uninspiring results we see in our third quarter results reflect the fact that political uncertainty, currency fluctuations and the vagaries of the Brexit process are continuing to weigh on business growth prospects.’

‘The Chancellor’s Autumn Budget is a critical opportunity to demonstrate that the government stands ready to incentivise investment and support growth here at home. A failure to act, or a conscious choice to provide a short-term sugar hit to the electorate rather than the protein boost the economy needs, would have significant consequences for the UK’s medium-term growth prospects.’

‘Now is the time to take bold action, and create the conditions to help the economy rebound from a period of anaemic growth. Government must demonstrate competence, coherence, and above all a clear plan to support the economy through a period of change.’

Infrastructure Report and BCC Survey Undermine Early GBP Gains

Also weighing on the Pound is a report from the National Infrastructure Commission, which has raised concerns over how well the government is preparing the UK economy for the challenges of the coming months, years and decades.

The National Infrastructure Commission has been firm on the need for the government to do more, stating;

‘Britain’s infrastructure must overcome major challenges if it is to meet the needs of future generations. Chief amongst these over the coming decades will be the threats posed to the country’s prosperity and quality of life by congestion, lack of capacity and carbon.’

‘None of these will be resolved by perpetuating the status quo. The need to address the UK’s weaknesses in infrastructure planning is widely recognised.’

Signs of weakness in infrastructure are particularly ill-timed, given the recent spat between Prime Minister Theresa May and Chancellor Philip Hammond on the topic.

AUD Supported Higher by Weak US Inflation Data

Weakness in the US Dollar has supported the Australian Dollar against the Pound today.

Markets were avoiding the high-risk AUD ahead of key US inflation data, which had the potential to drastically alter the odds of monetary tightening in the US – in the long-term, if not the December meeting.

As it transpires, inflation has disappointed forecasts, weakening hopes of a rate hike and therefore allowing the Australian Dollar to rise as the US Dollar falls.

AUD has been held back from making stronger gains, however, by the morning release of the latest Reserve Bank of Australia (RBA) Financial Stability Review.

The review warns about the overheating property market, in particular the pressure interest-only borrowers could face and the fact that the number of investors with multiple properties has grown swiftly.

The RBA has even announced it will stress test major banks to assess their ability to cope with a mortgage shock.

This indicates that the RBA remains wary of raising interest rates, lest it harm the most vulnerable borrowers in the property market and trigger wider weakness.
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