GBP/AUD Exchange Rate Declines as Traders Worry about PM?s Stability

January 10, 2018 - Written by Frank Davies

STORY LINK GBP/AUD Exchange Rate Declines as Traders Worry about PM?s Stability

On Tuesday’s trading session, the Pound saw an overall advance against the Australian Dollar, although this was relatively minor compared to the turbulence of late December.

The GBP/AUD exchange rate opened in the region of 1.7296 on Tuesday, later closing higher around 1.7322 in the evening.

As with Monday, Pound traders were mainly focused on Prime Minister Theresa May's ongoing cabinet reshuffle.

The PM’s much-touted reshuffle turned into a letdown for some traders, as high profile cabinet figures like Boris Johnson and Philip Hammond remained in place.

The overall takeaway was that the limited reshuffle had proven Mrs May’s tenuous position, in the wake of a narrowly-won general election.

A key change that didn’t take place was the appointment of a ‘Minister for No Deal’.

Some speculators believe that in a bid to appease hardline Brexit supporters in her cabinet, Mrs May could create such a position to open the door to leaving the EU without a binding deal.

This hasn’t been the case, which implies that the government is putting a low priority on plans for crashing out of the EU without a post-Brexit agreement.

Although such a conclusion bodes well for Brexit negotiations in 2018, the Pound has still fallen sharply against the Australian Dollar and the New Zealand Dollar, among others.

Low Trader Confidence Triggers Pound to Australian Dollar Drop

Sterling has fallen by -0.4% against the Australian Dollar today, mainly because of a continued lack of confidence in Prime Minister Theresa May.

The PM’s uninspiring cabinet reshuffle has failed to win her any favours among political commentators, although defenders have claimed that this was always an internal party rearrangement rather than a ‘Night of the Long Knives’ of 1962.

UK domestic data has mostly been supportive, although the Pound has remained in low demand against the New Zealand Dollar, Euro and Australian Dollar regardless.

National production levels have either risen by more than forecast or fallen by less than expected, although the trade deficit has grown by more than predicted in November.

Strong AU Export Figures Push Australian Dollar to Pound Rate Higher

The Australian Dollar has advanced against the Pound, the Euro and the US Dollar today, thanks to positive data about national exports.

Despite recent factory shutdowns in China, demand for Australian commodities does not seem to have slowed in December, according to the latest figures.

In addition to demand and export flows remaining high, further positivity has been added by the price resilience of Australian commodities like iron ore.

There is speculation that iron ore prices could pick up even further in the near-term, with a cyclone in Western Australia risking reduced supplies and therefore higher costs.

On the negative side of recent Australian news, it has been estimated that employment growth could slow in 2018. Sarah Hunter, Head of Economics in Australia at BIS Oxford Economics, has said;

‘A slowdown in employment is somewhat inevitable, given the underlying long run growth rate of the working age population and labour supply.

But jobs growth has also raced well ahead of output growth, and with domestic demand forecast to remain subdued this year [due to] moderate growth in consumer spending and an expected downturn in residential construction activity, we expect firms to slow the pace of hiring as we move through 2018’.

Pound to Australian Dollar Forecast: Will GBP/AUD Rate Rise on Slowing UK Inflation?

The next high-impact UK economic news won’t come until 16th January, when UK inflation rate readings for December will be released.

Estimates are for a minor reduction in inflation in December, both on the month and on the year.

Given current conditions for Bank of England (BoE) policymakers, this may lead to a small Pound appreciation.

This is because while slowing inflation would reduce the pressure on the BoE to consider an interest rate hike, inflation would still remain 1% above the BoE’s target of 2%.

The BoE has so far resisted committing to a string of interest rate hikes, mainly because high debt and low wage growth would make conditions worse for UK consumers.

If inflation does slow, Pound trader confidence could increase, leading to a Pound to Australian Dollar advance.

Australia’s next significant data will be out sooner, on 11th January.

The NAB business confidence reading is due out early in the day and could lead to an AUD/GBP rate rise.

While Australian retail sales are predicted to have slowed, the NAB confidence score out at the same time could boost AUD demand if it shows growth as forecast.

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TAGS: Pound Australian Dollar Forecasts