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GBP to AUD Exchange Rate Gains Modest as Risk-Sentiment Limits Sterling

November 28, 2018 - Written by Frank Davies

The British Pound to Australian Dollar (GBP/AUD) exchange rate’s Wednesday gains were modest, despite Sterling seeing a more solid recovery versus other major rivals like the Euro (EUR). The Australian Dollar avoided further losses against Sterling due to market risk-sentiment keeping the ‘Aussie’ buoyed.

Since opening this week at the level of 1.7713, GBP/AUD has generally trended with a downside bias. GBP/AUD touched a weekly low of 1.7595 on Tuesday. While GBP/AUD did recover slightly on Wednesday, it only recovered around half of its weekly losses and trended near the level of 1.7675 at the time of writing.

GBP Benefits from Hopes for Eventual Brexit Deal Passage

Demand for the Pound improved slightly on Wednesday, helping the British currency to rebound slightly from its Tuesday slide.

The primary cause of the Pound’s recovery was market hopes that even if the UK-EU Brexit bill is rejected by UK Parliament, it will be more likely to pass Parliament in a following vote.

Markets have been increasingly concerned by the possibility that the long-negotiated UK-EU Brexit deal could be knocked down in UK Parliament during a vote at the beginning of December.

In fact, as opposition to the bill is so broad, even amongst UK Prime Minister Theresa May’s allies, markets are starting to price an initial defeat into Sterling.

Steve Fielding, Professor of Politics at Nottingham University, believes there is very little confidence in the possibility of a first-time pass for the bill:

‘No one thinks this will get through the first time,

At least 90 MPs have said they will vote against it. The risk is actually that, with everyone discounting the first vote, you get more.’

Analysts expect the bill will go through some further negotiation or tweaks before it has a chance of passing.

However, others point out that very few within UK Parliament will be willing to allow the deal to collapse completely – which would lead to a ‘no-deal Brexit’. According to Peter Kinsella, Head of Foreign-Exchange Strategy at Union Bancaire Privee:

‘Anyone who votes against this is voting in favor of a hard Brexit,

I cannot imagine anyone in opposition would even seriously consider such a development.’

Hopes that ‘no-deal Brexit’ fears could help a softer Brexit to pass, or could even help the UK to negotiate more concessions, bolstered Sterling support slightly on Wednesday. According to Kenneth Broux, Strategist from Societe Generale SA:

‘Pound short positions will be favored until we know how parliament votes,

The deal will only pass if its amended. Article 50 could be extended to avoid a no-deal scenario; no-deal threat will be used to negotiate and extract concessions.’

AUD Supported by Hopes for US-China Trade Breakthrough

Despite some underwhelming Australian construction stats on Wednesday, the Australian Dollar was able to hold against Sterling gains thanks t
o stronger market demand for riskier trade-correlated currencies.
Investors have been more willing to take risks this week, amid broad market anticipation for an upcoming meeting between US President Donald Trump and China President Xi Jinping.

Trump and Xi are expected to meet for a formal dinner at a G20 summit in Argentina, set to take place at the end of the week.

While Trump indicated earlier in the week that he could introduce a new round of trade tariffs on US imports of Chinese goods, other US officials such as Director of National Economic Council Larry Kudlow have said that a ‘breakthrough’ may be possible.

Kudlow indicated that US President Trump may be open to solutions if China President Xi was also open.

His comments left investors more willing to take risks and riskier trade-correlated currencies like the Australian Dollar saw stronger performance.

GBP/AUD was still able to advance slightly though, as demand for risky currencies was limited by hawkishness from Federal Reserve officials.

GBP/AUD Forecast: Markets Turn Attention to G20 Summit

As the week enters its second half and November draws to an end, investors of risky trade-correlated currencies like the Australian Dollar will be increasingly focused on the upcoming meeting between US President Donald Trump and China President Xi Jinping.

The Presidents will meet at a formal dinner during the G20 summit in Argentina set to take place into the end of the week.

Markets are broadly hoping that there will be some kind of key development in US-China trade tensions during the meeting.

As a result of the anticipation for this meeting, risk-sentiment will remain volatile and sensitive until the outcome of the meeting becomes clearer.

This means the outlook for risky currencies like the Australian Dollar is unlikely to change much over the next day.

The Pound is unlikely to see major movement on Thursday either, as investors look for perceived shifts in opinion on UK Prime Minister Theresa May’s Brexit deal.
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