- US retail sales and consumer confidence bettered expectations – AUD weakened as odds of Fed rate hike increased
- ‘Brexit’ debate provoked Pound volatility – Optimism declined after CBI slashed growth forecast
- Oil price rally benefitted ‘Aussie’ – Commodities rallied on suggestions of global crude deficit
- UK CPI report in focus – Weaker inflation forecast to push GBP/AUD exchange rate lower
Less Dovish RBA Minutes Prompted Australian Dollar Rally
May’s Reserve Bank of Australia (RBA) meeting minutes revealed that policymakers had been generally hesitant to cut interest rates, encouraging hopes that the central bank will hold off from repeating the move in the near future. As a result the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate slumped sharply, trending in the region of of 1.9679 overnight.
Earlier…
Stronger US Data Reduced Demand for Australian Dollar on Fed Rate Hike Bets
With domestic data limited ahead of the weekend the Australian Dollar (AUD) remained on weaker form against rivals. The appeal of the commodity-correlated currency was also dented by stronger-than-expected US data. Both the latest US Advance Retail Sales and University of Michigan Confidence Index bettered expectations, suggesting more optimistic levels of consumer sentiment and raising the odds of an imminent interest rate rise from the Federal Open Market Committee (FOMC). With concerns already heightened that the Reserve Bank of Australia (RBA) could cut interest rates again in the near future this saw the ‘Aussie’ soften.
Particularly poor UK Construction Output figures failed to weigh on Pound Sterling (GBP), meanwhile, in spite of this seeming to suggest that the UK’s first quarter GDP might have been weaker than previously reported. Investor sentiment remained buoyed by the Bank of England’s (BoE) warning that ‘Brexit’ could potentially damage the domestic economy, as well as the fact that no policymakers had voted to cut interest rates on Thursday.
The International Monetary Fund (IMF) re-entered the referendum debate with its own caution on the possible negative impacts of a vote to leave the EU. With high-profile support for the ‘Remain’ camp continuing to mount, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate made further gains in response. Even so, some of this rally began to peter off towards the close of the day’s European session, with worries over the outlook of the UK economy increasing.
Volatile Risk Sentiment Drove Australian Dollar Movement
Market risk appetite declined further over the weekend in the wake of poor Chinese data, as Industrial Production and Retail Sales figures fell short of forecast. This raised fresh concerns of a persistent slowdown within the world’s second largest economy, boding ill for the wider global economy. As Lee Hardman, currency analyst at MUFG, noted:
‘The releases will heighten concern that economic growth in China is continuing to slow even with more aggressive policy easing in place. The latest new loans report did reveal as well that growth weakened more than expected in April following a surge in new lending in Q1. Market participants will be watching closely to see if China is becoming less willing to stimulate the economy as aggressively. The negative developments will keep downward pressure on regional currencies.’
A strong rebound in the price of oil helped to spur a resurgence in demand for higher-yielding assets such as the ‘Aussie’ on Monday, with investors relieved by Goldman Sachs’ suggestion that global crude oversupply is at least temporarily over. With the bullishness of the US Dollar (USD) also muted by worries over the US manufacturing sector, and increasing scepticism that the Fed could raise interest rates in June, the antipodean currency trended higher across the board.
Worries over ‘Brexit’ Weighed on Pound Sterling
The ‘Brexit’ debate remained the major influence on the Pound at the start of the week, with markets dismayed to see the Confederation of British Industry (CBI) lower its growth forecasts for the UK. In line with the BoE’s recent adjustment, the CBI expects the domestic economy to grow by 2% in 2016, as a result of referendum uncertainty postponing business spending plans. As the increased optimism surrounding the recent high-profile warnings against the potential fallout of a vote to leave faded this prompted Sterling to return to bearish form.
While the latest Rightmove House Price survey confirmed that prices had risen by 7.8% on the year in May, in line with forecasts, this was not enough to shore up the ailing Pound. Despite signs of strength within the domestic housing market concerns remain as to the robustness of the wider economy, particularly ahead of the latest Consumer Price Index report.
GBP/AUD Exchange Rate Forecast: Weaker UK Inflation May Dent Pound Further
Tuesday’s UK CPI results are expected to cause pronounced volatility for the Pound, as investors anticipate a slight slowing in domestic inflationary pressure. Inflation is expected to slow from 0.4% to 0.3% on the month in April, a sign which would reinforce fears that the BoE could remain on a dovish bias for longer. With the UK economy continuing to face downside pressure from referendum uncertainty, a stronger figure could trigger a more sustained Pound rally, however.
The minutes of the RBA’s May policy meeting are likely to impact the appeal of the ‘Aussie’. Markets will be keen to see the extent of the dovishness on display amongst policymakers, particularly with regards to future policy decisions. Should the minutes indicate a hesitance to cut rates further, however, the GBP/AUD exchange rate is expected to slump sharply.
Current GBP, AUD Exchange Rates
At the time of writing, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was slumped in the region of 1.9670, while the Australian Dollar to Pound Sterling (AUD/GBP) pairing was making strong gains around 0.5082.
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