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Pound Australian Dollar Exchange Rate Rallies as RBA Signals Dovish Policy Outlook

February 16, 2021 - Written by Frank Davies

Dovish RBA Meeting Minutes Shore up Pound Australian Dollar Exchange Rate

In the wake of the release of the latest set of Reserve Bank of Australia (RBA) meeting minutes the Pound to Australian Dollar exchange rate rallied.

The appeal of the Australian Dollar weakened markedly in response to the minutes, which proved rather dovish in nature.

With the central bank signalling that ‘very significant’ monetary support needs to remain in place for some time AUD exchange rates were left to trend lower across the board.

Although this dovishness was largely expected the Australian Dollar still weakened in response to the minutes, especially in the face of the latest positive US economic data.

In the absence of any renewed sense of market risk appetite there was little to keep AUD exchange rates from slipping.

Lack of Westpac Leading Index Growth to Limit Australian Dollar Upside

The mood towards the Australian Dollar may remain muted on Wednesday if the Westpac leading index holds steady at 0.1% as forecast.

A continued lack of acceleration in economic activity could give investors fresh incentive to sell out of the Australian Dollar.

Without evidence of greater growth momentum within the economy AUD exchange rates are likely to remain on the back foot.

Anticipation ahead of the release of January’s set of labour market data could also weigh heavily on the antipodean currency.

However, if the headline unemployment rate dips from 6.6% to 6.5% as forecast this may see the Australian Dollar return to a stronger footing once again.

Signs of improvement within the domestic labour market could shore up confidence in the health of the wider Australian economy, knocking the GBP/AUD exchange rate off its positive footing.

Softer UK Inflation Forecast to Drag on Pound Australian Dollar Exchange Rate

On the other hand, support for the Pound may well weaken in the near term with the release of January’s UK inflation data.

As markets expect to see the headline inflation rate soften slightly on the year the Pound to Australian Dollar exchange rate looks set to come under pressure.

The appeal of the Pound could weaken sharply if inflation proves negative on the month as forecast, with such a weak result likely to encourage Bank of England (BoE) dovishness.

As long as inflation continues to run significantly short of the BoE’s 2% target the risk of future monetary policy action is likely to remain, to the detriment of GBP exchange rates.
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