GBP AUD Exchange Rate Slumps as EU Maintains Tough Line on Brexit

March 7, 2018 - Written by Frank Davies

STORY LINK GBP AUD Exchange Rate Slumps as EU Maintains Tough Line on Brexit

In spite of a general increase in market risk aversion the Pound to Australian Dollar (GBP/AUD) exchange rate failed to find any fresh support on Wednesday morning.

The resignation of key White House economic adviser Gary Cohn prompted fresh investor jitters, with the risk of an imminent global trade war seeming to have strengthened further.

However, while risk appetite deteriorated once again the Australian Dollar was still able to hold onto a stronger footing against the Pound for the time being.

As fears over Brexit picked up once again the appeal of the Pound slumped sharply, as confidence in the prospect of a softer form of Brexit continued to diminish.

Pound Under Pressure as UK and EU Remain at Odds Over Brexit

Markets were largely discouraged by the EU’s response to Theresa May’s recent speech on the matter of Brexit, with the two sides still looking largely at odds.

A leaked EU document suggests that the reaction to the speech has been less than positive, with the document noting that it represented ‘a change in tone, but not in substance’.

Naturally this provoked fresh worries over the likelihood of the EU and UK achieving a comprehensive deal before the March 2019 deadline, which is now little over a year away.

With both the EU and UK looking to have maintained their previous red lines the potential for any imminent breakthrough appears distinctly limited.

As uncertainty over the shape of the UK’s future trade relationships continues to weigh on the domestic outlook GBP exchange rates are likely to see little in the way of upside potential.

Tonight’s RICS house price balance for February is forecast to show a further loss of momentum within the UK housing market, with growth slowing from 8% to 7%.

This would give investors fresh incentive to sell out of the Pound, reflecting wider concerns over the underlying health of the UK economy.

Even so, if Friday’s raft of trade and production data improves in line with forecasts this could offer the GBP/AUD exchange rate a rallying point.

So long as there are signs of resilience within the domestic economy this should keep hopes for another Bank of England (BoE) interest rate hike alive.

Australian Dollar Exchange Rates Remain Vulnerable to Trade War Jitters

Demand for the Australian Dollar picked up somewhat on Wednesday, in spite of weaker-than-forecast fourth quarter gross domestic product data.

Even though the Australian economy was found to have lost some of its momentum in the final quarter of 2017 this had a rather limited impact on AUD exchange rates.

Markets remain hopeful that the Reserve Bank of Australia (RBA) is still on course to return to tighter monetary policy in the months ahead.

As analysts at Nomura noted:

‘The press release repeated key messages and did not indicate any material shift in thinking. Rates bears could point to the addition of a new phrase, that “the rate of wage growth appears to have troughed”, although bulls could note a more emphatic comment that “the housing markets in Sydney and Melbourne have slowed”.
‘Overall, the press release suggests that, with the passage of time, the RBA still believes it is on track towards meeting its inflation and employment objectives. We remain on the lookout for any shift in tone over coming months, which we believe will most likely be in a hawkish direction. Our base case remains for a first rate hike in Q1 2019, although we still see risks tilted towards an earlier move.’

If January’s Australian trade balance is found to have returned to a state of surplus tomorrow this could see the GBP/AUD exchange rate cede further ground.

Evidence that the economy is holding up in spite of increased global market tensions should help to keep something of a floor under the Australian Dollar, at least in the short term.

However, if there is further escalation of the Trump administration’s protectionist rhetoric and trade measures this is likely to dampen the appeal of the risk-sensitive ‘Aussie’.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Australian Dollar Forecasts