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GBP/AUD Exchange Rate Tumbles as EU Reject London Brexit Deal Proposals

January 31, 2018 - Written by John Cameron

The Pound Australian Dollar (GBP/AUD) exchange rate slides as EU rejects London Brexit deal.

Pound (GBP) Slides EU Officials Reject Brexit Deal for London

While the weakness in the ‘Aussie’ following Australia’s inflation figures allowed Sterling to advance in overnight trading the Pound quickly fell back again during the European session.

This is largely in the wake of reports that’s EU officials have again rejected proposals to grant the City of London a bespoke Brexit deal pertaining its financial service sector.

According to Reuters, sources within closed door meetings between British financiers and Officials from the European Union’s executive suggest that the EU is reluctant to grant any kind of special deal for the City due to the UK government’s decision to pull out of the single market.

The latest plan rejected by the EU proposed that the UK and EU would allow financial institutions to retain cross border access, on the condition that both sides would observe international regulatory standards.

A British Source told Reuters;

‘They have made it very clear to us that this is unacceptable to them. This was our best and frankly only proposal. We don’t have a plan B.’

The news is unlikely to induce confidence in the UK government’s attempts to win a ‘bespoke’ trade deal from the EU, which Theresa May frequently states would be her preferred option.

On top of this the rejection of a deal for London will again increase fears that the city would see a mass exodus of firms post Brexit as banks and other financial institutions relocate at least some of their operations to the continent in order to retain access to the EU market.

Australian Dollar’s (AUD) Weakened as Inflation Misses

The Australian Dollar found itself sliding overnight on Tuesday following the release of Australia’s latest CPI figures.

According to data published by the Australian Bureau of Statistics (ABS) domestic inflation held at 0.6% in the fourth quarter, falling short of expectations that it would reach 0.7%.

This saw the annualised figures also fall short as year-on-year inflation climbed from 1.8% to 1.9%, against expectations that it would reach 2%.

Ben Jarman, Senior Economist at J.P. Morgan said;

‘The Australian CPI reading for Q4 was weak, despite the anticipated support from very large increases in volatile items such as fresh food, fuel, and tobacco being realised.’

‘Given the temporary spikes in a few groups, we had expected today’s result to be something of a head-fake and distraction from the very weak underlying trend in core inflation. But not even the bump from the volatile items could cause a stir,’

Most importantly is that today’s disappointing inflation figures are likely to sink any chances of the Reserve Bank of Australian (RBA) voting to raise interest rates any time in the foreseeable future.

Jarman adds;

‘The diffusion index measuring the proportion of basket items running below the bottom of the RBA’s 2-3% target band rose to 67% in Q4, back to the all-time highs. This supports our view that the RBA is unlikely to be hiking any time soon.’

GBP/AUD Exchange Rate Forecast: UK Manufacturing PMI to Rise?

Looking ahead the GBP/AUD exchange rate may rally again on Thursday as the UK publishes its latest Manufacturing PMI.

Economists forecast that tomorrow’s figures will show that British factory activity rose this month, with the manufacturing index predicted to climb from 56.3 to 56.5.

On top of this a speech by the Bank of England’s (BoE) Alex Brazier could also lift the Pound tomorrow if he echo’s Governor, Mark Carney’s recent comments that the bank may raise its growth forecasts for 2018.

Meanwhile the Australian Dollar may tumble overnight as domestic data is expected to show that Australian Building Permits fell sharply in December.

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