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Pound Australian Dollar (GBP/AUD) Exchange Rate Struggles for Direction After BoE Expresses Brexit Concerns

December 20, 2018 - Written by Frank Davies

Bank of England Policy Meeting Limits Pound Australian Dollar (GBP/AUD) Exchange Rate Momentum

It came as no surprise to markets when the Bank of England (BoE) voted unanimously to leave interest rates on hold at its December meeting, limiting the impact on the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate.

However, the mood towards the Pound did sour somewhat in response to the BoE’s latest comments on the subject of Brexit.

As policymakers warned that Brexit-based uncertainty is continuing to intensify, weighing on the financial markets and the overall growth outlook, GBP exchange rates came under some pressure.

With uncertainty set to persist for some time to come the potential for a 2019 BoE interest rate hike appeared to diminish on the back of the minutes.

As analysts at TD Securities commented:

‘Brexit is clearly becoming an increasing concern to the MPC, as evidenced by its frequent appearance in the Summary. We sense that the MPC is becoming less certain about the "smooth transition" assumption underlying its forecasts. Indeed, the probability that Article 50 needs to be extended by a few months is increasing materially, in our view.’

A surprise uptick in November’s Australian unemployment rate, meanwhile, limited the appeal of the Australian Dollar on Thursday morning, leaving the GBP/AUD exchange rate on a narrow trend.

Mixed Australian Labour Market Data Limits Australian Dollar (AUD) Exchange Rate Downside

The underlying details of the Australian labour market data were not overly negative in nature, however, as the increase in the unemployment rate was matched by a higher participation rate.

This indicates that a larger number of Australians are now active within the job market, boding well for economic growth going forward.

Even so, as the Federal Reserve signalled that it still expects to raise interest rates twice in 2019 the upside potential of AUD exchange rates proved limited.

With the global economy showing signs of slowing and the Fed set to tighten monetary policy further the Australian economy looks set to come under further pressure in 2019.

This is likely to encourage the Reserve Bank of Australia (RBA) to maintain a more cautious outlook, diminishing the odds of interest rates rising in the near future.

GBP Exchange Rates Vulnerable Ahead of UK Public Sector Borrowing Data

GBP exchange rates could lose further ground on Friday if November’s UK public sector net borrowing figure shows any increase in new government debt.

Unless there is evidence that borrowing is easing investors are unlikely to find fresh cause for confidence in the UK outlook.

The finalised third quarter gross domestic product data could also put pressure on the GBP/AUD exchange rate ahead of the weekend.

Fresh signs of slowing economic momentum may weigh heavily on the Pound, even if there is no change to the headline figures.

With the issue of Brexit unlikely to see any resolution in the near future the upside potential of GBP exchange rates remains limited.

Australian Dollar (AUD) Exchange Rates Set for Volatility on Risk Sentiment

As long as the US Dollar remains under pressure this should help to support the appeal of the commodity-correlated Australian Dollar.

With Australian data thin on the ground in the days ahead, however, AUD exchange rates could struggle to sustain any positive momentum for long.

The thinner trading volumes of the Christmas holiday week are also likely to result in some Australian Dollar volatility.

If market worries over the outlook of the global economy continue to mount, though, this may shore up the GBP/AUD exchange rate.
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