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GBP AUD Exchange Rate Flounders in Spite of Hawkish BoE Comments

April 10, 2018 - Written by Frank Davies

Comments from Chinese president Xi Jinping encouraged a resurgence in market risk appetite, to the detriment of the Pound Australian Dollar (GBP/AUD) exchange rate.

Demand for the risk-sensitive Australian Dollar picked up in response to President Xi’s more measured tone on the subject of trade, which suggests a greater chance of compromise.

Even though the Pound also found support on Tuesday morning this was not enough to boost the GBP/AUD exchange rate.

BoE Hawkishness Fails to Return Pound Australian Dollar Exchange Rate to Stronger Footing

Confidence in the Pound was somewhat boosted by the latest comments from Bank of England (BoE) policymaker Ian McCafferty.

Although McCafferty is widely known to be one of the most hawkish members of the Monetary Policy Committee (MPC) investors were still encouraged by his more optimistic tone.

As McCafferty noted a belief that the UK labour market has no more slack left in it and that ‘we shouldn’t dally when it comes to tightening policy modestly’ this encouraged bets that a May interest rate hike remains on the table.

However, this still failed to set GBP exchange rates on a bullish run as it remains to be seen whether the rest of the MPC is of the same mind with regards to monetary policy.

Markets showed some reluctance to favour the Pound ahead of Wednesday’s raft of UK data, particularly as the NIESR gross domestic product estimate is expected to point towards first quarter growth of just 0.3%.

Signs that the UK economy is continuing to lose momentum could weigh heavily on the GBP/AUD exchange rate tomorrow.

On the other hand, both the visible trade balance and industrial production figures are forecast to show an improvement in February.

A solid narrowing of the visible trade deficit may be enough to give the Pound a boost higher across the board.

Optimistic NAB Business Survey Boosts Australian Dollar Demand

While the NAB business confidence and conditions indexes failed to push higher on the month this was not enough to hamper the Australian Dollar.

All in all, markets were inclined to take a more positive view of the Australian economy, with the underlying details of the report proving encouraging.

As Alan Oster, NAB Group Chief Economist, noted:

‘Not only do the well above average business conditions continue to point to robust business activity in Australia, it is also broadly based as conditions were equal to, or above, their historical average in all industries.

‘Leading indicators in the survey softened this month, with capacity utilisation easing slightly, while forward orders gave up much of last month’s spike.

‘Conditions are strongest in mining in trend terms, and are equal to, or above, their historical average in all industries.

‘The Survey results for March do not change our outlook for the Australian economy. The strength in business conditions and leading indicators are consistent with stronger economic growth in coming quarters and the Survey employment index is pointing to strong jobs growth which should reduce unemployment, and put gradual upwards pressure on private sector wages. We expect that towards the end of this year the RBA will be in a position to start increasing the current emergency low policy rate although it will depend heavily on the data flow – particularly for wages and inflation - and the risk is that any action by the RBA will be delayed.’

A similarly upbeat showing from tomorrow’s Westpac consumer confidence index may offer further encouragement to AUD exchange rates.

Comments from Reserve Bank of Australia (RBA) Governor Philip Lowe will also be in focus, with investors still looking for some sign of a shift towards greater hawkishness.

If Lowe maintains a more dovish outlook, though, the GBP/AUD exchange rate is likely to benefit from a fresh bout of ‘Aussie’ softness.

Any renewed sense of market risk aversion, meanwhile, could see the Australian Dollar returning to a weaker footing over the coming days.
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