Pound Australian Dollar (GBP/AUD) Exchange Rate Rises on Dire Fed Outlook

June 11, 2020 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Rises on Dire Fed Outlook

Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Edges Higher as Fed Spooks Investors

The Pound Sterling Australian Dollar (GBP/AUD) exchange rate edged up by around 0.3% on Thursday. This left the pairing trading at around AU$1.8279.

The risk-sensitive Australian Dollar was left under pressure today following yesterday’s US Federal Reserve meeting.

The US central bank posted its bleak economic expectations for the world’s largest economy, spooking investors and weighing on the ‘Aussie’.

Traders flocked back to the safety of the US Dollar (USD) after an earlier slump supported riskier assets such as AUD and GBP.

Investors scrambled back to safety after the Fed said it expects rates to remain near zero for years to come, and speaking via video link the bank’s Chair, Jerome Powell noted:

‘It is a long road. We are not even thinking about thinking about raising rates.’

Commenting on this, analysts at Deutsche Bank, led by head of thematic research, Jim Reid noted:

‘The Fed reiterated that it expects to maintain the near-zero fed funds rate until it is confident the economy is on track to achieve the central bank’s dual mandate. [...] Powell reinforced this message with the line that they are not even ‘thinking about thinking about raising rates.’’

The Fed’s forecasts show that the US economy is likely to contract by around -6.5% this year. Added to this, the country’s unemployment rate is going to remain at a high level, stuck at around 9.3% by the end of 2020.

This weighed on the risk-sensitive ‘Aussie’ and according to Peregrine Treasury Solutions’ executive director, Bianca Botes:

‘The gloomy outlook by the Fed brought over optimistic markets back to reality.’

Sterling (GBP) Edges Higher despite Brexit Woes

The Pound edged higher against the Australian Dollar, but struggled and fell against both the US Dollar (USD) and Euro (EUR) following a downbeat Federal Reserve.

GBP/AUD rose as traders flocked towards safer bets, but the risk of Brexit and negative exchange rates from the Bank of England (BoE) continued to weigh on Sterling.

According to UBS Global Wealth Management’s chief investment officer, Mark Haefele:

‘Sterling has been rallying against the US Dollar. While we see specific reasons for an appreciation of the Pound, the move underlines the broader vulnerability of the US Dollar, especially as fears over COVID-19 subside.’

However, GBP gains against the ‘Aussie’ were limited as Britain’s departure from the EU remains the Sterling’s biggest headwind.

Wednesday saw the European Union’s chief negotiator Michel Barnier urge the UK to adjust its demands in the few months remaining before the end of the transition period.

He stated the country is seeking a trade relationship with the EU that is too close to that of a member of the EU.

Speaking to a forum in Brussels, Mr Barnier stated:

‘The truth is that in many areas [Britain] is demanding a lot more than Canada, Japan or many of our other [trade] partners.

‘In many areas it is looking to maintain the benefits of being a member state without the constraints. It is looking to pick and choose the most attractive elements of the [EU] single market without the obligations.’

Pound Australian Dollar Outlook: Will British GDP Send GBP Lower?

Looking ahead, the Australian Dollar (AUD) could continue to slide against the Pound (GBP) if traders remain cautious at the end of the week.

However, Sterling could soon give up any gains as traders focus on Friday’s UK GDP data. Economists largely expect data to show the British economy has suffered a record contraction in April due to the coronavirus lockdown being in full-force.

It is expected April will be the low point of the country’s economic slump as the majority of the country was subject to strict lockdown measures.

Economic forecasts from analysts range from a dire -31.5% slump to an -8.5% decline. Even the best-case scenario is still worse than anything seen during the global financial crisis in 2008-2009.

Disappointing British growth data is likely to send Sterling lower, and if risk appetite remains weak the Pound Australian Dollar (GBP/AUD) exchange rate will be left flat.

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TAGS: Pound Australian Dollar Forecasts