Growing Fears about Brexit-City Conditions Cause GBP/AUD Exchange Rate Losses

May 29, 2018 - Written by James Fuller

STORY LINK Growing Fears about Brexit-City Conditions Cause GBP/AUD Exchange Rate Losses

Last week, the Pound to Australian Dollar exchange rate opened trading in the region of 1.7908 on Monday but closed down lower around 1.7620 on Friday.

The Pound (GBP) was primarily weakened over the course of trading by signs that a Bank of England (BoE) interest rate hike was likely to be further off.

Expectations for an imminent rate hike began to slip early on, when BoE Governor Mark Carney estimated that Brexit had caused a £-900 drop in UK household incomes.

This emphasised the cautious nature of Mr Carney’s leadership and suggested that there would need to be consistent levels of wage growth to support a future BoE interest rate hike.

The week also ended on a sour note when UK GDP growth rate estimates on Friday showed a slowdown for both the year-on-year and quarter-on-quarter readings.

Not all of last week’s UK news was negative, however; BoE official Gertjan Vlieghe turned hawkish by stating that there could be six UK interest rate hikes over the next three years.

Additionally, UK retail sales levels were reported to have risen sharply in April, above expectations.

This latter event unfortunately only had a limited positive effect, as economists predicted that UK retail sales activity could fall in the future because of higher inflation.

Last week’s main Australian events included a speech from Reserve Bank of Australia (RBA) Governor Philip Lowe.

Mr Lowe made a cautious statement about Australia’s future relationship with China, warning that:

‘A stable and robust financial system in China is clearly in Australia's interest.

‘Perhaps the single biggest risk to the Chinese economy at the moment lies in the financial sector and the big run-up in debt there over the past decade.

‘The experience is that the build-up of financial risks like those seen in China is almost always followed by a marked slowdown in GDP growth or a financial crisis.’

Daily GBP/AUD Update: Pound to Australian Dollar Exchange Rate Declines as City of London’s Future Uncertain

The Pound (GBP) has struggled against the Australian Dollar (AUD) today, making £1 worth around AU$1.7607.

This drop is primarily because of fears about the state of the City of London financial sector after Brexit, something that is currently an unresolved issue.

The City is effectively the hub of UK banking and financial services activities, but there is a worry that these institutions could abandon the City after Brexit.

The lack of a definitive deal for UK financial services with the EU after leaving is the main driver behind these concerns.

In the best case scenario, an exclusive City-EU deal would be agreed, but such a proposal has recently been rejected by EU Chief Brexit Negotiator Michel Barnier.

AUD/GBP Exchange Rate Rises despite Risk of Worse Relations with China

A weaker Pound has enabled an AUD/GBP exchange rate rise today, but the Australian Dollar has nonetheless been shaken by recent news about the Australia-China relationship.

It has been reported that Chinese government interference in Australian politics has been ongoing and systemic, a conclusion that risks provoking the ire of Australia's biggest trading partners.

This has historically been a difficult issue to tackle for the Australian government, with high levels of Chinese investment in the country raising questions about how much influence this spending brings.

A report commissioned by Prime Minister Malcolm Turnbull has seemingly shed light on the extent of the situation; one contributor, John Garnaut, said:

‘Under the uncompromising leadership of President Xi Jinping, China's activities have become so brazen and so aggressive that we can't ignore it any longer.’

If the report leads to a hostile reaction from China then future relations between the two nations could be damaged, which may panic Australian Dollar traders and devalue the currency.

GBP/AUD Exchange Rate Forecast: Will UK Consumer Confidence Data Cause Pound to Australian Dollar Recovery?

There is a limited amount of UK economic data left this week, but Pound Sterling (GBP) could still rise against the Australian Dollar (AUD) on the news.

First off, Thursday’s GfK consumer confidence reading for May is predicted to show an improvement to the monthly measure of economic optimism.

This is tipped to shift from -9 points to -8, which while a small improvement could still raise Pound trader confidence.

Further ahead, Friday morning will see May’s UK manufacturing PMI released. This is predicted to show a minor slowdown in sector activity.

If the actual reading shows a smaller-than-expected slowdown or a surprise increase in activity then the Pound to Australian Dollar (GBP/AUD) exchange rate could rise.

Australian Dollar movement might be caused by Wednesday’s building permits reading for April, or Friday’s AU manufacturing sector reading (also covering May).

Both data releases are forecast to print negatively, which might enable a fairly straightforward GBP/AUD exchange rate rise.

Fewer permits granted will suggest that the construction sector could see a slowdown in the coming months.

Similarly, reduced manufacturing sector activity is also likely to reduce the likelihood of strong economic growth figures going ahead.

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TAGS: Pound Australian Dollar Forecasts