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GBP to AUD Exchange Rate Recovers Ground Despite Threat of No Confidence Vote Against UK PM

November 16, 2018 - Written by Frank Davies

After sustaining a significant decline on Thursday the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate started to recover some ground ahead of the weekend.

As investors took a temporary breather from Brexit-based anxiety the Pound was able to return to an uptrend, reversing some of the previous day’s losses.

However, reports of a brewing vote of no confidence against Theresa May still limited the upside potential of GBP exchange rates.

As the fallout from the proposed Brexit deal continues to unfold this could see the GBP/AUD exchange rate sliding back towards its three-month lows.

Prospect of No Confidence Vote Limits Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Upside

With the stability of May’s position as prime minister shaken by the push back against her proposed deal the outlook for the Pound appears muted.

Even though Environment secretary Michael Gove opted not to resign, slightly easing the pressure on May, this is unlikely to be enough to see off the threat of a leadership challenge.

Commenting on May’s current position, Jane Foley, Senior FX Strategist at Rabobank, noted:

‘The stakes are high. Not only is she attempting to shore up support for her Brexit deal but she will also be looking to head off a challenge to her position. The next few days will be crucial both in determining if there is still a chance that May can push her plan through parliament but also in defining the influence of the PM going forward.

‘GBP plunged on the back of the surge of political uncertainty.

‘Over the next few days the very real prospect of a hard Brexit will likely ensure that the Pound remains vulnerable. Additionally any turn of events in Westminster that appears to increase the risk of a general election would likely compound the vulnerability of the Pound, given the Labour party’s policies in favour of nationalisation.’

If the odds of a general election are seen to rise in the days ahead this could prompt a fresh slump for the GBP/AUD exchange rate.

Unless Wednesday’s UK public sector net borrowing figure proves encouraging the Pound is likely to remain on the back foot.

An increase in new government debt would give investors fresh incentive to sell out of the Pound, with a higher deficit encouraging worries over the outlook of the domestic economy.

With Brexit-based anxiety already weighing on the UK economy any signs of fragility look set to increase the pressure on GBP exchange rates.

Australian Dollar (AUD) Exchange Rates Under Pressure Due to Risk Aversion

The general sense of market risk aversion left the Australian Dollar on a weaker footing, meanwhile, as political tensions in Europe encouraged investors to pile into safe-haven assets.

While Thursday’s Australian labour market data bettered expectations this was not enough to support AUD exchange rates for long.

Even though the tighter labour market points towards a more resilient Australian economy the chances of any imminent shift in the Reserve Bank of Australia’s (RBA) policy outlook still appear limited.

Further volatility may be in store for the Australian Dollar on Tuesday, therefore, with the release of the RBA’s latest set of meeting minutes.

If the minutes show that policymakers are content to leave monetary policy on hold for the foreseeable future this could encourage AUD exchange rates to trend lower.

On the other hand, a more hawkish tilt to the minutes may see investors piling back into the Australian Dollar and revising the odds of a 2019 interest rate hike higher.

Wider market jitters could also limit the strength of AUD exchange rates over the coming days, with European politics still likely to diminish the appeal of risk-sensitive currencies.

As long as the US Dollar remains on a bullish footing demand for the Australian Dollar looks set to prove limited, even though the impact of a December Federal Reserve interest rate hike is already priced in by markets.
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