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Trump Talks Tough Trade - Pound Australian Dollar (GBP/AUD) Exchange Rate Soars

March 5, 2018 - Written by Toni Johnson

Pound Australian Dollar (GBP/AUD) Exchange Rate Climbs on Threat of Global Trade War

The Pound Australian Dollar (GBP/AUD) exchange rate hit the ground running on Monday, capitalising on risk aversion amongst the markets due to US President Donald Trump’s latest trade tariff threats and finding some support on an upbeat UK service sector purchasing managers’ index (PMI).

Markets continue to try and assess the potential influence of a trade war for riskier, commodity based currencies like the Australian Dollar, with markets increasingly concerned not with the 25% tariff on steel, but with potential retaliatory measures from China and the EU.

European Commission President Jean-Claude Juncker has warned that the EU could consider retaliatory tariffs on ‘Harley-Davidson, bourbon and on blue jeans’, and Beijing has also warned that it will move to protect its interests.

President Trump was not convinced, however, pointing to the fact that the US has massive trade deficits with both countries, and that the EU already has notably large tariffs on various US goods.

In this respect, the US has very little to lose and a lot to gain.

The President stated:

‘If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars which freely pour into the US. They make it impossible for our cards (and more) to sell there. Big trade imbalance!’

Nonetheless, if this behaviour proves more than talk and China does respond, then Australia could see a massive loss in jobs and a sizable reduction in investment.

Kristian Kolding and Chris Richardson of Deloitte Access Economics reflected this sentiment:

‘Yes, the world economy would take a hit, which would see lower prices for Australian exports such as coal and iron ore. But the resultant weaker world growth and lower commodity prices would hurt the Australian dollar more than most other currencies, meaning the local currency would fall against the $US in the first year’.

UK Service Sector Perks up – Pound (GBP) Exchange Rates Supported

Britain’s services businesses perked up this month according to a survey from IHS Markit, further reinforcing market bets that the Bank of England (BoE) will move to raise interest rates in May.

Markit’s latest services purchasing managers’ index (PMI) printed at 54.5, up from 53.0 in January and beating the market forecast of 53.3.

This marked the highest reading in four months, with accelerated growth in job creation, payroll numbers and a higher operating capacity combining to send optimism higher.

With services being the UK’s largest contributor to GDP this upbeat result bodes well for the strength of the UK’s economy.

Howard Archer, EY ITEM Club’s Chief Economic Advisor shared his thoughts on the results:

‘It is particularly encouraging to see new business growth improving to a nine-month high, although demand for consumer services remains pressurised by squeezed purchasing power’.

For IHS Markit Economist Chris Williamson, however, this result could provide more of an incentive for the BoE to move hawkishly in May, with the latest ‘upturn in the surveys’ leaving a May rate hike ‘very much in play.

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: Just how Likely is a May Rate Rise?

The majority of economists polled by groups such as Reuters expect the BoE to raise interest rates again in May, though this could be highly dependent on UK Prime Minister Theresa May securing a Brexit transition deal before then.

Furthermore, the Prime Minister will soon be expected to reveal the UK’s counter-proposal to the situation regarding the Northern Irish border, with Downing Street insisting that Northern Ireland will not remain in the customs union (beholden to the European Court of Justice) and that there will be no hard border between Northern Ireland and the Republic.

If talks in this regard do not offer progress then hopes for a rate rise in May could diminish, thus putting the Pound Australian Dollar (GBP/AUD) exchange rate under greater pressure.
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