The Australian Dollar to Pound Sterling (AUD/GBP) and Australian Dollar to US Dollar (AUD/USD) exchange rates strengthened on Monday as economists raised their bets that the Reserve Bank of Australia will cut interest rates at its upcoming policy meeting.
The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate hit a session high of 1.985
Poor domestic data released over the weekend raised concerns over the strength of the economy and triggered the ‘Aussie’s’ slide against the Pound, US Dollar and other major peers. According to the Australian Industry Group’s Performance of Manufacturing Index (PMI), activity in the sector fell by 3.6 points to 45.4.
The figure was below the 50 level, which divides expansion from contraction.
‘That was largely driven by a lack of domestic demand. That is becoming very clear because as the sector as a whole contracts, exports are growing. The currency decline is absolutely helping exporters get their products overseas and to allow them to be much more competitive, but at the same time now we are seeing the domestic economy slowing,’ said Innes Willox, AIG chief executive.
The sub-index for exports held steady at 53.9, manufacturing production fell 3.7 points to 45, while the sub indices for supplier deliveries (46.9) and stock levels (47) also slipped into contraction.
Also occurring at the weekend was the surprise rate cut announcement by the Chinese central bank. The move increased fears that Australia’s largest trading partner is weakening more than previously expected. The move saw the banks benchmark lending and deposit rates cut by a quarter of a percent.
Another report published on Monday by the Australian Bureau of Statistics added to the pressure on the ‘Aussie’ as it showed that company operating profits in the nation fell by -0.2% in the final quarter of 2014. Economists had been forecasting for a rise of 0.3%.
RBA Forecast to Cut Interest Rates
With the Australian economy, weakening economists have raised their bets that the RBA will make another interest rate cut on Tuesday. If a rate cut does occur we can expect to see the ‘Aussie’ decline by at least half a cent, however if rates are left unchanged it will likely rise by half a cent.
‘We think they will cut, but even if they don’t cut on Tuesday, we think they’ll cut again in the next few months. The odds of a cut have lifted from 39% to 56%,’ said Commonwealth Bank of Australia currency strategist Joseph Capurso.
The RBA rate announcement will occur at 3.30 am GMT.
