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GBP to AUD Exchange Rate Continues to Climb on Fresh Brexit Hopes

November 20, 2017 - Written by Minesh Chaudhari

Despite some underwhelming UK inflation and job market data last week, the British Pound to Australian Dollar exchange rate was able to advance as investors lost appetite for risky currencies like the ‘Aussie’. Sterling continued to firm on Monday amid fresh hopes for progress in Brexit talks.

Last week saw the GBP/AUD exchange rate open at the level of 1.7200 and gain over two cents in value, closing at 1.7455 on Friday. The pair briefly hit a six month high of 1.7566 on Friday and trended near the key 1.75 level once again on Monday morning.

GBP Supported by Hopes for Progress in Brexit Negotiations

Investors looked to politics and fiscal policy for an excuse to buy the recently weak Pound when markets opened on Monday morning, despite Britain’s highly uncertain economic outlook.

Over the weekend, UK Chancellor Philip Hammond hinted that the UK government may be prepared to raise the price of its offer on the UK-EU ‘divorce bill’.

The divorce bill is the financial settlement that Britain must pay to leave the EU and settle its financial obligations with the bloc.

It has been a source of major contention for months now and has been one of the biggest issues in an ongoing UK-EU negotiations deadlock.

While the UK government cabinet is expected to clash on the details of the bill on Monday, investors took Hammond’s comments as a willingness from the UK government to satisfy EU officials and speed up the pace of Brexit negotiations.

According to Stephen Macklow-Smith from JPMorgan Asset Management;

‘I think for the moment people are still fixated on progress in negotiations between the UK and the EU ... the currency reacts to that most quickly,

There is scope for Sterling to bounce if we get a fairly benign deal, and that would then translate to some rotation within the market, because when sterling weakens, overseas earners do well.’

On top of Brexit hopes, investors are also anticipating the UK Autumn Budget, which will be presented by Hammond on Wednesday.

Markets currently speculate that Hammond will give consumers a boost in the Budget, as months of high inflation and trailing wage growth have led to a pay squeeze that has dampened consumer confidence and activity.

AUD Kept Weak by Risk-Off Movement

Investors have been hesitant to buy risk-correlated currencies like the Australian Dollar in recent sessions, due to poor commodity data and rising political uncertainties in the US.

High stockpiles in iron ore, Australia’s most lucrative commodity, have left analysts concerned that any gains in prices of iron ore or steel will be temporary or limited.

On top of low risk-sentiment, the Australian Dollar has little domestic support either.

Last week’s Australian data was highly disappointing and indicated that Australian wage growth was trending below expectations.

This, as well as an underwhelming Australian job market report, left investors more convinced that the Reserve Bank of Australia (RBA) was likely to maintain its cautious, neutral stance in the long-term rather than hint at any hawkishness over the next year.

GBP/AUD Forecast: Brexit or Budget News Could Boost Sterling Demand

The Pound’s advances against the Australian Dollar could continue in the coming days depending on the outcomes of cabinet Brexit talks and of course UK Chancellor Hammond’s Autumn Budget on Wednesday.

If the UK government cabinet agrees to raise its offer on the Brexit ‘divorce bill’, the Pound is likely to surge. A disagreement on the other hand would lead to a GBP plunge and ‘hard Brexit’ fears would worsen.

UK public borrowing data will be published on Tuesday and if these impress they could make investors even more optimistic towards the Autumn Budget.

It is speculated that Hammond will propose policies aimed at taking some pressure off UK consumers as they continue to weather a domestic pay squeeze.

As for the Australian Dollar, it could find some support if Tuesday’s Reserve Bank of Australia (RBA) meeting minutes are less dovish than feared. Besides that though, shifts in risk-sentiment are likely to remain influential in AUD trade.
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