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GBP to AUD Exchange Rate Fails to Sustain Recovery Attempt as UK Economic Outlook Unchanged

May 24, 2018 - Written by David Woodsmith

A strong UK retail sales report on Thursday was not enough to make the British Pound to Australian Dollar (GBP/AUD) exchange rate particularly more appealing. Instead, Sterling investors anticipated Britain’s latest Q1 growth projections, due Friday, while the Australian Dollar benefitted from weakness in the US Dollar (USD).

Following largely narrow movement last week, GBP/AUD is on track to suffer major losses this week. GBP/AUD opened the week at the level of 1.7927 and has fallen over two cents. On Wednesday the pair touched on a two-month-low of 1.7648 and at the time of writing the pair trended closer to the level of 1.7690.

GBP Demand Limited Despite Surprisingly Strong UK Retail Sales Results

Following Wednesday’s surprisingly low UK inflation rate report, Thursday saw the publication of Britain’s April retail sales results.

UK retail activity was forecast to have improved from -1.2% to 0.7% month-on-month in April, and have slowed from 1.1% to 0.1% year-on-year.

However, both results came in well above market forecasts. The monthly figure surged from a revised -1.1% to 1.6%, while the yearly figure unexpectedly climbed from a revised 1.3% to 1.4%. The prints excluding fuel sales also came in well above forecasts.

Some analysts viewed the results as cause to become more confident in the chances of a Bank of England (BoE) interest rate hike in August. According to Andrew Wishart from Capital Economics:

‘Looking ahead, with employment still rising at a robust pace, real wages on the up again, and consumer confidence high by past standards, we are upbeat about the outlook for consumer spending,

Overall, this should help the economy to regain some pace in Q2 and further supports our view that the [Bank’s Monetary Policy Committee] will press ahead and hike interest rates in August.’

However, despite the surprisingly strong results, other analysts were highly mixed on the retail outlook and some believed it did not really impact the Pound or Bank of England (BoE) outlooks much.

According to Samuel Tombs from Pantheon Economics:

‘We continue to expect retail spending to increase only at a glacial rate this year,

Consumers’ confidence has weakened and savings intentions have picked up. Both business surveys and vacancy data point to a slowdown in employment growth, while retailers still plan to implement larger-than-usual price rises over the next three months’

Even though Britain’s retail sales results beat forecasts, the Office for National Statistics (ONS) acknowledged that retail activity was slower in the long-term.

This, couple with the second consecutive month of weaker than expected UK inflation left investors expecting that Britain’s economy may not be able to sustain tighter monetary policy from the BoE in the coming months after all.

AUD Benefits from Weakness in Rivals and Risk-Sentiment

Despite persisting uncertainties about global trade and some lasting concerns about the possibility of a US-China trade war, this week has seen risky trade-correlated currencies like the Australian Dollar benefit from a US Dollar (USD) selloff.

Following weeks of stronger USD performance, the currency’s rally seemingly came to an end this week. As the US currency was sold, its riskier rivals like the ‘Aussie’ became more appealing to investors.

As the Australian Dollar has been benefitting from US Dollar weakness and risk-sentiment, it has not needed much domestic support.

This has helped AUD to hold most of this week’s gains against Sterling, despite Wednesday’s Australian construction work report coming in well below expectations.

GBP/AUD Forecast: UK Growth Projections in Focus

While UK retail results failed to give much of a boost to the Pound or Bank of England (BoE) interest rate hike bets, the Pound to Australian Dollar exchange rate could still see stronger support before markets close for the week.

Friday will see the publication of Britain’s second Q1 Gross Domestic Product (GDP) projection. UK growth is currently projected to have slowed from 0.4% to 0.1% quarter-on-quarter and from 1.4% to 1.2% year-on-year.

If UK growth is revised higher, the Pound may see stronger demand as investors would become more hopeful that Britain’s economy is resilient despite some poor datasets in recent months.

If strong UK growth data bolsters Bank of England rate hike bets, the Pound to Australian Dollar outlook will improve. Otherwise though, GBP/AUD is likely to end the week lower.

Next week the pair could fall even lower, depending on if the ‘Aussie’ sees stronger domestic support. Australian private sector credit, manufacturing PMIs and retail sales stats will be published in the second half of next week.
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