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GBP to AUD Exchange Rate Rebound Continues on Reserve Bank of Australia Jitters

July 26, 2019 - Written by David Woodsmith

After seeing steep losses for most of the past month, the British Pound to Australian Dollar (GBP/AUD) saw a solid rebound this week. As investors bought the Brexit battered Pound back from its cheapest levels in profit taking, it was able to benefit from broad weakness in the Australian Dollar as Reserve Bank of Australia (RBA) interest rate cut bets rose.

GBP/AUD opened the week at the level of 1.7754, and after a brief slip at the beginning of the week continued to rebound from the previous week’s worst 2019 level of 1.7656.

By Friday, GBP/AUD had recovered almost two cents, essentially all of the previous week’s losses. At the time of writing, GBP/AUD trended closely to the level of 1.7940.

Looking ahead, next week’s economic calendar is busier.

While Pound investors will remain focused on Brexit developments, many key Australian ecostats could influence RBA speculation and the Australian Dollar throughout the week.

GBP Exchange Rate Rebound Slows as Brexit Fears Continue to Worsen amid New Government

Britain’s new Prime Minister, Boris Johnson, took office and established his new government this week. Analysts noted that many of his cabinet picks were prominent hard Brexit advocates.

Sterling had enjoyed a brief rebound from its cheapest levels in profit-taking in the middle of the week, as markets showed relief that the new Prime Minister had been confirmed.

It meant that fresh progress could finally be made on Brexit after over a month of the Conservative Party leadership contest causing uncertainty.

However, market optimism towards the new government is limited. Analysts remain anxious that the chances of a no-deal Brexit have notably worsened due to the harder Brexit stances of Johnson and many of his key officials.

On top of this, Brexit fears returned at the end of the week, marking an end to the Pound’s short recovery.

Overnight, European Commission President Jean-Claude Juncker asserted to Johnson that the already agreed UK-EU withdrawal agreement was the only agreement on offer.

Johnson had been saying he would renegotiate the Brexit plan. This firm negotiation stance from the EU was widely expected however.

According to a European Commission spokesman:

‘President Juncker listened to what Prime Minister Johnson had to say, reiterating the EU’s position that the withdrawal agreement is the best and only agreement possible – in line with the European council guidelines.’

AUD Exchange Rates Tumble as Reserve Bank of Australia (RBA) Interest Rate Cut Bets Rise

Until recently, investors had been expecting a modestly dovish tone from the Reserve Bank of Australia (RBA) going forward.

As Australian data continued to fall short of expectations, US-China trade tensions remained high, and the RBA indicated that further monetary policy easing would only have limited impact on the economy, investors expected one more rate cut from the bank this year.

However, this week saw Westpac bank economists predict two more interest rate cuts from the RBA before the end of the year, and this was followed by a more dovish than expected tone from RBA Governor Philip Lowe.

During a speech towards the end of the week, Lowe indicated that there was the possibility of lower interest rates, but not much chance of rates rising again within the foreseeable future. He said:

‘The board is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 per cent and 3 per cent. It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range,’

As investors had been speculating possible rate hikes from the RBA as recently as the beginning of the year, news that there would not be any rate hikes any time soon made it easier for GBP/AUD to keep rising.

GBP/AUD Exchange Rate Forecast: Australian Inflation Rate to Drive RBA Bets

As concerns about Australia’s low inflation keep investors concerned about the possibility of a more dovish Reserve Bank of Australia (RBA) in the coming months, next week’s key Australian inflation rate data could be even more influential.

In what is likely to be the most influential dataset of the week for Pound to Australian Dollar investors, Australia’s Q2 inflation rate is expected to have shown a solid improvement over Q1.

The yearly inflation figure is forecast to have risen from 1.3% to 1.5%. The quarterly figure is forecast to rise from 0.0% to 0.5%.

If inflation beats forecasts, RBA interest rate cut bets could lighten and the Australian Dollar could strengthen.

Other Australian data to keep an eye out for includes building permits on Tuesday, manufacturing on Thursday and retail sales on Friday.

The Bank of England (BoE) will meet next week too, but unless the bank’s tone is particularly surprising, Pound to Australian Dollar exchange rate investors are more likely to focus on Australian data and potential Brexit developments.
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