GBP AUD Exchange Rate Leaps Higher on Publication of Joint EU-UK Brexit Treaty Draft

March 19, 2018 - Written by John Cameron

STORY LINK GBP AUD Exchange Rate Leaps Higher on Publication of Joint EU-UK Brexit Treaty Draft

Speculation of a potential breakthrough in Brexit negotiations prompted the Pound to Australian Dollar (GBP/AUD) exchange rate to extend its bullish run on Monday morning.

Markets were encouraged by rumours that UK Brexit secretary David Davis and chief EU negotiator Michel Barnier could imminently announce the agreement of the 'broad' terms of a transition deal.

This naturally prompted the Pound to trend sharply higher across the board, helping to ease fears that the UK is at risk of an exit from the EU via the cliff-edge in March 2019.

The GBP/AUD exchange rate was further shored up once the UK and EU published a joint draft of the proposed Brexit treaty, highlighting a 'complete accord' on citizens' rights and the financial settlement.

However, with the issue of the Irish border still outstanding, among others, there remains significant work to be done before a final agreement is reached.

Solid Australian Unemployment Forecast to Shore up Australian Dollar Exchange Rates

Fears over the prospect of a global trade war have helped to keep the Australian Dollar under pressure, meanwhile.

The threat of increased US protectionism has naturally limited the appeal of the commodity-correlated Australian Dollar, with base metal prices weakening once again.

In the absence of any fresh Australian data this left AUD exchange rates with little in the way of support at the start of the week, with market risk appetite largely limited.

Demand for the antipodean currency is likely to remain generally muted ahead of Thursday's Australian labour market data.

The unemployment data is notoriously changeable in nature, encouraging a generally cautious approach from investors.

Even so, as forecasts point towards the unemployment rate holding steady at 5.5% in February the downside potential of AUD exchange rates is likely to be a little limited.

As Tony Kelly, senior economist at NAB, commented:

'With growth running slightly above potential, spare capacity should gradually be eliminated, resulting in the unemployment rate tracking down and wages and inflation pressures gradually picking up. The RBA will not hike rates until there is comprehensive evidence that wages growth/inflation is moving in the right direction. At this stage, we have the first hike pencilled in for November 2018, with some risk that it occurs later.'

So long as the Australian economy demonstrates fresh signs of resilience this should keep something of a floor under the Australian Dollar.

However, with the Federal Reserve set to raise interest rates at its latest policy meeting the GBP/AUD exchange rate could see an additional boost on Wednesday evening.

Pound Bullishness to Falter on Weaker UK Consumer Price Index Data

The GBP/AUD exchange rate could lose some of its positive momentum tomorrow, however, on the back of the UK consumer price index data for February.

Inflationary pressure is forecast to have eased from 3.0% to 2.8% on the year, something which could discourage investors.

As above-target inflation gives the Bank of England (BoE) incentive to raise interest rates a weaker showing here may undermine hopes that the central bank will tighten monetary policy again in the near future.

Even so, other Pound-positive developments could help to offset any disappointment with the latest inflation data this week.

As Viraj Patel, research analyst at ING, noted:

'The case for a steeper UK rate curve next week would find additional support from:

'1. A Brexit-contingent hawkish signal at the March BoE policy meeting (Thu). While it may be too early for BoE officials to offer markets a clear signal of intent over a forthcoming rate hike – as they did in September 2017 – we do think the reiteration of a resilient UK economy and concerns over sticky above-target inflation will equate to sufficient enough signal to keep UK rates supported.

'2. A series of constructive UK economic data releases - namely core CPI inflation remaining sticky at 2.6% YoY (Tue) and headline wage inflation also showing signs of moving higher (Wed). Feb UK retail sales (Thu) is expected to come in a tad softer - though markets may look through this given the largely weather-related disruptions.'

If the BoE adopts a more hawkish tone at Thursday's meeting this may give the GBP/AUD exchange rate a fresh leg up in the short term.

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TAGS: Australian Dollar Forecasts