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Little Turbulence from Budget Leaves GBP/AUD Inching Higher on FOMC Minutes Approach

November 22, 2017 - Written by Toni Johnson

The British Pound to Australian Dollar exchange rate is climbing this afternoon, although today’s delivery of the Autumn Budget by Chancellor of the Exchequer Philip Hammond has done nothing to provide further support for Sterling.

The GBP/AUD exchange rate was up 0.3% to 1.7509 at the time of writing.

Middle of the Road Budget from Hammond has Little Impact Upon GBP

Philip Hammond has today outlined his latest spending plans, although judging from the reaction of the Pound it was a rather middle-of-the-road affair.

Encouraging points included an additional £3 billion in funding for Brexit-related contingencies, which shows that Hammond has accepted the need to prepare for forms of Brexit other than his preferred ‘soft’ option.

Guardian Deputy Political Editor Rowena Mason explained;

‘This is a big boost to the £700m previously allocated for preparations. It will be seen as a victory for those hard Brexiters pushing for more money to get ready for the possibility of leaving the EU with no deal. But critics of Brexit are likely to seize on the high sum, which could otherwise have been spent on improving public services.’

However, other aspects of the Budget are less promising, such as the downwards revision to forecasts for economic growth for every year from the present to 2021.

The Office for Budget Responsibility (OBR) has also cut its productivity forecasts, with the figures marking the first time in modern history that productivity growth has been projected below 2% for the entire forecast period.

Average earnings growth has also been slashed to just 0.2% for every year until 2021 – a downwards revision of up to -0.8% in some instances compared to forecasts made in March.

AUD Kept Soft by Approach of US FOMC Meeting Minutes

The approach of minutes from the most recent US Federal Open Market Committee (FOMC) meeting is keeping the Australian Dollar soft today.

This morning’s data proved positive, but risk-appetite has cooled notably as markets await the final Fed policy communication before the December interest rate meeting.

The number of skilled vacancies grew 0.5% in October, while September’s growth was revised higher to 0.6%.

Construction work done in the third quarter saw an impressive surge in growth, swelling from 9.3% to 15.7%, instead of posting the -2.3% decline economists were expecting to see.

However, odds of 91.5% of an interest rate hike from the Fed next month are weighing on the Australian Dollar.

The most recent policy meeting showed that the Federal Reserve seemed less confident in the need to hike interest rates than expected but, while USD slumped in response, this did nothing to dampen the odds on the Fed Funds futures market of monetary tightening.

Should the meeting minutes back up this idea that the Fed isn’t as fully committed to a hike as markets have been assuming, there could be significant potential for the Australian Dollar to post gains.

However, if the Fed minutes are seen as clearly signalling an interest rate hike, then the GBP/AUD exchange rate is likely to shoot higher.

UK Growth Data to Give GBP a Boost Versus AUD Tomorrow?

There is plenty of domestic UK data on the calendar tomorrow, including high-tier growth rates, to keep the GBP/AUD exchange rate on volatile form.

Conversely, the Australian data calendar is completely empty, leaving the Australian Dollar vulnerable to the fallout from tonight’s FOMC minutes and developments on the commodity markets.

The biggest driver of Pound Sterling movement will be the second estimate of third-quarter UK gross domestic product, with forecasts expecting the growth projections to hold steady at 0.4% on the month and at 1.5% on the year.

Markets will be relieved to see that there has not been a downwards revision to the data, although the figures coming in on forecast would be little to celebrate given the UK economy was growing 0.6-0.7% during months immediately after the referendum to leave the European Union.

Also important tomorrow will be the September index of services, which will chart the growth of the UK’s most vital economic sector.

Should service growth be revealed to have faltered, the Pound could slump, as this would indicate a further slowdown was on the way.

The Confederation of British Industry reported sales and total distributed reported sales data for November could create some support for the Pound, as the former is expected to show that the index has recovered from -36 to 3.
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