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GBP to AUD Exchange Rate Hits Worst May Level despite RBA Interest Rate Cut Bets

May 22, 2019 - Written by Frank Davies

Despite yesterday’s news that the Reserve Bank of Australia (RBA) was likely to cut Australian interest rates as soon as June, the British Pound to Australian Dollar (GBP/AUD) exchange rate fell today and even hit its worst levels all month. Worsening concerns about the Brexit process and the stability of UK politics are driving Sterling lower this week, as tomorrow’s EU elections approach.

Even though RBA interest rate cut bets are rising, GBP/AUD could see bigger losses than last week’s fall from 1.8570 to 1.8520 if it is unable to recover by the end of the week. While GBP/AUD briefly put in a recovery attempt yesterday, the pair tumbled again today, and at the time of writing was trending close to a low of 1.8356. This was the worst GBP/AUD level all month.

Recent UK data has done little to support the Pound. Instead, concerns of the UK political and economic outlooks continue to gradually worsen and drag the Pound more and more.

Even the unappealing Australian Dollar advanced today, due to a brief recovery in trade-sentiment.

GBP Exchange Rate Losses Exacerbated by Deepening UK Political Fears

A combination of political factors, including UK politics, EU politics, and of course the Brexit process have been putting significant pressure on the Pound, and caused the latest drop in the British currency today.

UK Prime Minister Theresa May briefly offered some hope for investors hoping for a softer Brexit yesterday, with her proposed ‘new’ Brexit plan.

However, the plan was ultimately criticised by both members of her government, as well as the opposition Labour Party she hoped to appeal to. It led to investors betting that the deal would be blocked by Parliament if it was put to a vote.

Following this, investors became more anxious that Prime Minister May was likely to be replaced a hard Brexit supporter when she steps down from the role.

Political uncertainty only worsened in reaction to speculation that Prime Minister May could be ousted as PM even sooner than expected. This only caused the Pound selloff to deepen this afternoon.

According to comments from Neil Wilson of this afternoon:

‘News wires are flashing with a slew of reports suggesting the PM is about to be ousted. It seems the cabinet has now had enough and if they don’t move now Theresa May will be safe for a while longer. The pressure on the PM is intense and it’s hard to see how she can survive. We should caution though that she is the master of clinging on no matter what.’

AUD Exchange Rates Advance despite Rising Reserve Bank of Australia (RBA) Interest Rate Cut Bets

Yesterday, Reserve Bank of Australia (RBA) indicated that the bank was prepared to cut Australian interest rates soon, and analysts have suggested that two interest rate cuts could happen over the next few months.

According to Gareth Aird, Senior Economist at CBA:

‘We expect the RBA to cut the cash rate by 25 basis points to 1.25% on 4 June. A further rate cut looks probable and we think that it will most likely arrive at the August board meeting’

Despite investors generally betting that the Reserve Bank of Australia (RBA) will cut Australian monetary policy as soon as next month, the Australian Dollar saw relatively solid demand today and was able to sustain gains versus Sterling.

This was largely because the latest US-China trade developments were perceived as positive.

The US announced that it would temporarily ease a ban on Chinese tech giant Huawei, bolstering hopes that the US wants to reach some kind of agreement over Huawei.

As China is Australia’s biggest trade partner, this, as well as news that China was still importing iron ore from Australia, kept the Australian Dollar surprisingly resilient yesterday.

GBP/AUD Exchange Rate Forecast: EU Elections and Other Political News Remains in Focus

Amid a lack of significant Australian data due for publication tomorrow, the Pound to Australian Dollar exchange rate is most likely to be influenced by the day’s political developments.

For Pound investors, the focus will be on the day’s EU election.

UK citizens will head to the polls to vote for which UK political parties should represent the nation in European Parliament.

The new, populist Brexit Party is expected to perform strongly in the vote. Any sign that the ruling Conservative Party will perform worse than expected or that UK Prime Minister Theresa May could be ousted sooner than expected would leave the Pound even weaker.

On the other hand though, as the Australian Dollar has been surprisingly resilient despite Reserve Bank of Australia (RBA) interest rate cut bets, the ‘Aussie’ does have the potential to fall further.

If US-China trade tensions worsen again, the Australian Dollar’s resilience could fade and the Pound to Australian Dollar exchange rate could recover some of today’s losses.
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