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Pound to Australian Dollar Exchange Rate Benefits from Risk-Off Movement amid Brexit Speculation

January 17, 2019 - Written by Frank Davies

Investors continued to buy the British Pound to Australian Dollar (GBP/AUD) exchange rate today, despite broad market uncertainties in how the Brexit process could unfold. Speculation that a No-deal Brexit can be avoided and a soft Brexit could become more likely bolstered the British currency, while the Australian Dollar was pressured by market risk-aversion.

Since opening this week at the level of 1.7791, GBP/AUD has been one of this week’s best performing major Pound pairs. GBP/AUD briefly dipped amid the UK Parliament Brexit vote on Tuesday, but since then easily rebounded and continued to put in solid gains.

On Thursday, GBP/AUD touched on a two week high of 1.8039, and continued to trend above the level of 1.80 at the time of writing.

The Pound to Australian Dollar exchange rate may be in for further gains before the end of the week too, if US-China trade tensions persist or Friday’s Australian housing sales stats disappoint.

GBP Exchange Rates Benefit from Speculation of Brexit Delay and Softer Brexit Possibilities

Since UK Parliament voted against UK Prime Minister Theresa May’s Brexit withdrawal deal earlier in the week, the Pound has been edging higher on Brexit speculation as bets shift away from a No-deal Brexit.

While No-deal Brexit remains a possibility, signs that UK Parliament will do what it can to prevent that worst-case scenario outcome have made investors more optimistic.

It has also led to speculation that the formal Brexit date is likely to be delayed. As politicians and analysts are concerned that the chances of being prepared for Brexit in time are running out, the perceived chances of a delay have also risen.

On top of investors increasingly believing the Brexit date will be officially delayed, speculation has also risen that a softer Brexit or even a second referendum are becoming more of a possibility.

According to Lee Hardman, Currency Analyst at MUFG, investors were briefly excited by comments from Labour Party Leader Jeremy Corbyn:

‘There was an initial move higher on the Corbyn comments today to see if he is supporting a move for a second referendum,

Generally the market is more optimistic that following the heavy defeat the other day that we will head towards a softer or no-Brexit outcome.’

On top of this, some investors were bullish regarding news that Conservative Party backbencher Sarah Wollaston pledged to table an amendment for a second referendum.

The amendment would be voted on on the 29th of January, during the next full day Brexit debate in the House of Commons.

AUD Exchange Rates Unappealing amid Renewed US-China Trade Tensions

Investors sold the Australian Dollar on Thursday, as a combination of factors including Australian data and global risk-sentiment made investors hesitant to buy the relatively risky trade-correlated currency.

The ‘Aussie’ had seen strong performance in recent weeks, due to market optimism about US-China trade negotiations and lower Federal Reserve interest rate hike bets.

As a result, with Fed bets now largely priced into markets already and US-China trade concerns hitting headlines again, investors were hesitant to keep buying the Australian Dollar.

News that US authorities had opened a criminal probe into Chinese tech giant Huawei made investors more concerned about tensions between the US and China, and investors sold the Australian Dollar.

On top of this. Australia’s November home loans data was mixed, and Australian consumer inflation expectations for January fell from 4% to 3.5%.

GBP/AUD Exchange Rate Forecast: Political Developments in Focus but Australian Home Sales Also Ahead

The Pound to Australian Dollar exchange rate is unlikely to shed this week’s gains unless there is a sudden disappointing Brexit development, or a sudden boost in demand for risky currencies like the Australian Dollar.

The UK government is expected to present its ‘Plan B’ Brexit proposal next week sometime, but markets doubt it will be significantly different to what the government has already offered.

Any more surprising Brexit developments over the next week of course have the potential to drive the Pound however. Sterling will remain volatile as the Brexit process is filled with uncertainties and predictions for how the process will develop differ from analyst to analyst.

Australia’s new home sales results from HIA will be published on Friday which could cause some late-week movement in the Australian Dollar, but the data is unlikely to be hugely influential.

Instead, the Australian Dollar is more likely to be driven by US-China tensions, or other news that could influence risk-sentiment. This means political developments are ultimately most likely to influence the Pound to Australian Dollar exchange rate towards the end of the week.
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