- ‘Brexit’ poll suggested strong ‘Remain’ campaign lead – Pound Sterling buoyed across the board
- Hawkish FOMC minutes raised odds of June rate hike – Australian Dollar undermined by increased risk aversion
- Pound extended bullish run on UK retail data – April sales rose 4.3% on the year
- GBP/AUD exchange rate forecast to lose ground on profit taking – Domestic data limited ahead of weekend
Weaker Australian Wage Growth Dented Australian Dollar (AUD) Demand
Risk appetite weakened significantly in the wake of hawkish commentary from Atlanta Federal Reserve President Dennis Lockhart, who warned that markets were underestimating the chances of the Fed raising interest rates in June. Given that April’s US Consumer Price Index had entered the central bank’s target range for inflation, the odds of an imminent hike increased, putting downside pressure on the Australian Dollar (AUD).
Confidence in the ‘Aussie’ was dented further on Wednesday by an unexpected dip in the domestic Wage Cost Index. First quarter wage growth slowed from 2.2% to 2.1% on the year, defying expectations of a steady figure and suggesting fresh signs of weakness within the Australian economy. This dovish result led to increased worries that the Reserve Bank of Australia (RBA) could cut interest rates again in the near future, in spite of a stronger Westpac Leading Index.
Following the UK’s latest raft of employment data, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate continued to advance. While the figures were not universally positive, with wage growth proving a little mixed, the appeal of the Pound (GBP) was shored up. As analysts at Scotiabank noted:
‘The main [takeaway] (and probably most important in the context of the MPC) would be that the BoE’s end-year forecast for wages of 3% y/y is still within reach thanks to this miraculous bounce in bonus payments.’
However, the Pound entered a strong bullish run across the board on Wednesday afternoon in response to the latest poll carried out by IPSOS MORI. Markets reacted positively to the suggestion that the ‘Remain’ campaign had significantly extended its lead over the ‘Leave’ camp, with support polled at 55%-37%.
Fed Hawkishness and Strong UK Retail Sales Strongly Boosted GBP/AUD Exchange Rate
Overnight the GBP/AUD exchange rate surged still higher in the wake of the April meeting minutes of the Federal Open Market Committee (FOMC). Reinforcing the recent tone of policymakers, the minutes indicated that a June rate hike was under consideration. As the general expectation had been for a more cautious outlook, this prompted investors to pile into the US Dollar (USD), reducing the appeal of commodity-correlated currencies further.
This hawkish Fed commentary lead to increased worries of near term action from the RBA, given the negative impact of a strong US Dollar on the domestic economy. Although the Australian Unemployment Rate did not rise in April as expected this was not enough to encourage support for the softening antipodean currency. The general view of markets was largely echoed by researchers at ANZ, who noted:
‘While the RBA Minutes did not manage to satiate markets’ hunger for further validation of the Bank’s easing bias, we remain comfortable with the view that further easing is on the way. Wages data have reaffirmed the soft pulse seen in the CPI, and the ANZ Stateometer and employment numbers are showing that activity momentum is fading, though from elevated levels.’
The GBP/AUD currency pair went on to reach a three-month best of 2.0353 on Thursday morning, boosted by the UK’s Retail Sales data. Sales strongly bettered expectations to rise by 4.3% on the year in April, which seemed to indicate that referendum uncertainty had not particularly deterred consumers. This more robust result kept the Pound on a bullish run across the board, in the absence of any fresh concerns over the possibility of a ‘Brexit’.
GBP/AUD Exchange Rate Forecast: RBA Comments could Encourage Australian Dollar Higher
Ahead of the weekend it seems likely that the Pound could be softened by profit taking, given that referendum worries are expected to persist for some weeks to come. As the CBI Total Orders Trends figure is also forecast to show continued weakness the GBP/AUD exchange rate is expected to retreat somewhat.
Into next week the Australian Dollar could find some support on the back of a speech from RBA Governor Glenn Stevens. Should Stevens indicate a more relaxed outlook on monetary policy, investors could be inclined to push back their expectations for the timing of the central bank’s next interest rate cut. However, markets could well disregard any hawkish commentary as the outlook of the domestic economy remains decidedly muted.
Demand for the Pound could strengthen again if the UK’s Public Sector Net Borrowing figure for April shows a narrowing of the borrowing deficit. While Chancellor George Osborne has already missed his target for the 2015-2016 fiscal year, a lower figure would nevertheless increase confidence in the robustness of the domestic economy. Higher borrowing, however, would see the GBP/AUD exchange rate return to a downtrend.
Current GBP, AUD Exchange Rates
At the time of writing, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was trending higher around 2.0261, while the Australian Dollar to Pound Sterling (AUD/GBP) pairing was slumped in the region of 0.4933.
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