December 20, 2017 - Written by Frank Davies
STORY LINK GBP AUD Exchange Rate Weakness Persists on RBA Optimism and USD Softness
Weakness persisted in the Pound Australian Dollar (GBP AUD) exchange rate on Wednesday, with the relative softness for the US Dollar and recent optimism from the Reserve Bank of Australia (RBA) extending the ‘Aussie’ Dollar’s gains.
USD Fails to Capitalise on Trump Tax, AUD Exchange Rates Extend Lead
The vote on Republican tax reform proved a success late on Tuesday, marking the first major legislative victory for US President Donald Trump.
Despite economist expectations, however, the successful vote did not prompt a surge in the value of the US Dollar (USD), with markets seemingly leaning towards apprehensions that the reform will fail to bolster the US economy.
Some economists have also asserted that the sheer length of time in which markets were anticipating the reform simply negated its influence now that it has finally arrived.
Nonetheless, the ‘Aussie’ Dollar quickly capitalised on the weakness of its US counterpart.
The RBA’s December meeting minutes also assisted in bolstering the AUD, with the central bank pointing optimistically to strengths within the labour market, asserting that employment growth will continue to be ‘somewhat above average’ in the next few quarters.
The minutes also suggested that strong employment would eventually feed into higher wages and higher levels of inflation, (albeit at a slower pace).
This could, potentially, result in rate hikes in the years ahead, although this remains entirely dependent on the extent that inflation rates rise.
BoE Plans to Maintain EU Bank Access to UK, GBP AUD Remains Limited
The Bank of England (BoE) announced its intentions on Wednesday to maintain EU bank access to the UK.
This decision will effectively preserve jobs and tax revenues for the City of London, but it could also be greeted as a ‘sign of good will’ by the bloc.
This was the perspective of the head of the lobbying group TheCityUK, Miles Celic, who stated:
‘Encouraging EU banks to continue to operate in the UK will help preserve financial stability for the UK and the EU and will help defend London’s position as an open global financial centre’.
In other news, EU Chief Negotiator Michel Barnier has insisted that the Brexit transitionary process must end by the 31st of December 2020 in order to fit the EU’s financial calendar.
This was consistent with calls from UK Prime Minister Theresa May for a deal that would last ‘around’ two years, but it could result in the UK losing its representation in the European Parliament – having no say in shaping EU laws and regulations during this period.
Today’s news, whilst sufficient in bolstering the Pound against most of the other majors, failed to push GBP AUD out of the ‘Aussie’ Dollar’s favour.
BoE Governor Mark Carney’s speech on Wednesday, whilst anticipated by many, failed to move the Pound up or down, with his comments focusing primarily on Brexit rather than notable monetary policy changes for 2018.
GBP AUD Forecast: Brexit Transition Talks and UK GDP on the Horizon
Brexit negotiations continue to dominate the market outlook for GBP AUD, with the delay of trade talks until March 2018 (at the earliest) still fresh in the minds of investors.
Markets will also be watching Friday’s run of domestic data releases, however, with the UK’s gross domestic product figures expected to take the spotlight.
UK GDP is currently forecast to print at 1.5% year-on-year in the third quarter, consistent with the previous reading.
The International Monetary Fund (IMF), however, now expects growth of 1.6% overall this year, down from the previous estimate of 1.7% and slowing even further in 2018 to 1.5%.
IMF Chief Christine Lagarde claimed that uncertainty regarding the Brexit deal would likely cause UK businesses to delay investment plans even longer, at least until clarity is gained on aspects of trade.
Lagarde also pointed to rising inflation and stagnant wages – both of which continue to squeeze consumer spending.
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