On Friday afternoon, the Pound has risen against the Australian Dollar. Initially trading at a rate of 1.6777 earlier in the day, the pairing has since appreciated to 1.6876.
Good news for the UK has come late in the day, with EU officials finally agreeing to start discussing UK trade as part of Brexit.
There have been caveats – EU officials still want the UK to resolve its three initial issues in negotiations, so will only be discussing trade deals internally.
This minor victory is still being cheered by some economists, however, as it represents real, tangible progress after weeks or maybe even months of stagnation.
(First published October 20th, 2017)
The Pound has risen by 0.4% against the Australian Dollar today and has a chance to post greater gains if the upcoming budget is well-received.
In Australia, traders have expressed uncertainty about the benefits of a near-term Reserve Bank of Australia (RBA) interest rate hike.
Pound Predicted to Rally if November Budget brings Economic Miracle
The latest UK news has been better-than-forecast, showing a smaller-than-expected increase in the September borrowing deficit.
In light of this data, the Pound might be on track to rise against the Australian Dollar in late November.
This will depend on the contents of the November budget, which will be delivered by Chancellor Philip Hammond on the 22nd.
Hammond faces the challenge of initiating a widespread economic recovery in the midst of Brexit, when confidence is low and consumers are facing a prolonged wage squeeze.
With the September budget deficit being the smallest in a decade, some economists think this will allow the Chancellor ‘wriggle room’.
Giving a cautious take on Hammond’s options, however, Paul Hollingsworth from Capital Economics has said;
‘It is too soon for the chancellor to begin loosening the purse strings in response. After all, the OBR [Office for Budget Responsibility] expected the deterioration in the public finances to be back-loaded this year, reflecting the unwinding of a number of temporary factors.
Moreover, it looks set to revise down its assumptions about productivity and the economy’s potential to grow in its November forecasts, which is likely to significantly reduce the room the Chancellor left himself against his fiscal targets.
As a result, this is likely to constrain the Chancellor’s ability to provide big giveaways in the very near term’.
If Hammond does somehow perform the impossible and present a well-received budget next month, the Pound could see a temporary advance against the Australian Dollar.
RBA Rate Hike Odds could Weigh on Future Australian Dollar Value
The Australian Dollar recently appreciated when unemployment fell, but traders remain sceptical about whether this will bring a 2018 Reserve Bank of Australia (RBA) interest rate hike.
Those in the pro-hike camp believe that the RBA could disregard low wage growth and hike anyway in 2018, although others feel this might cause significant economic damage.
The primary worry is that households struggling to pay mortgages now might face even worse conditions after a rate hike, given that wages are not rising enough to make up the difference.
Looking at the problems faces by households after a rate hike have been Su-Lin Ong and Robert Thompson, Strategists at RBC Capital Markets.
Both economists feel that a hike in the region of 1% would create significant difficulties;
‘[A rate hike] would add to the list of challenges for household consumption which continues to run below trend.
The dominance of variable rate mortgage and larger average loan size suggests that RBA policy traction will be higher than previous tightening cycles.
Reflecting a number of factors, any policy normalisation by the RBA is likely to be slow and cautious’.
While the RBA might limit itself to 0.25% increases for future rate decisions, this may still put pressure on the worse-off in Australia and could devalue the Australian Dollar.
Recent Interbank GBP AUD Exchange Rates
At the time of writing, the Pound to Australian Dollar (GBP AUD) exchange rate was trading at 1.6777 and the Australian Dollar to Pound (AUD GBP) exchange rate was trading at 0.5959.
Comments are closed.