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Higher UK GDP Growth Triggers Pound to Australian Dollar Rally

October 25, 2017 - Written by David Woodsmith

On Tuesday’s trading session, the Pound made a minor decline against the Australian Dollar. GBP opened trading in the region of 1.6902, later closing lower at 1.6888.

UK GDP Growth Ticks Up, Sending Pound Soaring

The Pound has been strongly supported by UK domestic data today, although it has not been especially impressive in the long-term.

UK quarter-on-quarter GDP has risen in the third quarter, from 0.3% to 0.4%. While a minimal increase, the fact that the Pound has rallied shows how optimistic traders are about this news.

Giving a pessimistic reception to the news was Geraint Johnes. A Professor of Economics at Lancaster University Management School, Johnes said;

‘The headline growth of 0.4% over the third quarter represents a slight increase over the second quarter figure.

Over the year, growth is just 1.5%, and the quarterly figure suggests little momentum going forward’.

The Treasury also commented indirectly on the news via a statement from Chancellor Philip Hammond, which was considered a boilerplate response by some. Hammond said;

‘We have a successful and resilient economy which is supporting a record number of people in employment.

My focus now, and going into the Budget, is on boosting productivity so that we can deliver higher-wage jobs and a better standard of living for people across the country’.

Looking ahead, some economists have seen this as the final barrier crossed before the Bank of England (BoE) can raise interest rates.

Giving a highly optimistic forecast for next month, Commerzbank economist Peter Dixon has said;

‘There is now nothing standing in the way of the Monetary Policy Committee acting on the message which it has been giving to the market since September that a near-term rate hike is warranted.

From a signalling perspective, it might be difficult for the MPC to avoid a rate hike next week and still maintain the market credibility required to sustain its forward guidance policy’.

That said, Geraint Johnes has warned that it might be too early to tell about next week’s rate decision;

‘While many commentators were suggesting that a figure above 0.3% might signal an interest rate hike in November, the outturn figure represents stable but slow growth – certainly well below trend.

Unless the Bank of England’s agents’ reports, which are due out on 8 November, point to an unexpected degree of wage pressure, an early increase in the interest rate would be premature’.

Yet another cautious remark has come from Ben Brettel of Hargreaves Lansdown. Mr Brettel has said;

‘Yet if rates do rise as expected, the move will be largely symbolic – though it will be the first rise in over 10 years.

A 25 basis point increase merely reverses last year’s cut, which was arguably unnecessary, and returns rates to where they’ve been for the entire post-crisis period.

I expect the BoE to proceed with caution from here’.

Lower Odds of RBA Rate Hike Drag Australian Dollar Down

Today’s Australian Dollar-weakening factor has been the release of inflation rate data for the third quarter, which has failed to meet expectations.

For the year-on-year figure, a deterioration from 1.9% to 1.8% has been seen, instead of the 2% rise that had been predicted.

Economists have reacted negatively to the news, as it implies that the Reserve Bank of Australia (RBA) might hold off on raising interest rates in 2018.

Taking this line was Henry St John, an economist at JP Morgan. St John said;

‘We're of the view that the Reserve Bank will be on hold in 2018. They are not in a position to hike rates in the medium-term and these numbers confirm that’.

Will Pound Crash on Upcoming CBI Stats?

While the Pound has been in high demand against the Australian Dollar today, this could all change before noon on Thursday.

The next UK data will come from the Confederation of British Industry (CBI), which will be releasing its distributive trade figures for October.

On the month, forecasts are for a sharp reduction in the measure, from 42 points to 15.

There isn’t much high-impact Australian data left this week, so further AUD movement may be tied to any US Dollar fluctuations.
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