Disappointment over UK Borrowing Data Dented Pound (GBP) Exchange Rates
The Pound (GBP) experienced a sharp boost on commentary from Prime Minister Theresa May that the UK will avoid the ‘Brexit cliff edge’ with an interim deal. This eased the concerns of investors somewhat, considering that negotiations with the EU seem unlikely to conclude satisfactorily within the two year timeframe. Even so, with the government still on track to significantly overshoot its borrowing target for the 2016-2017 fiscal year the Pound to Australian Dollar (GBP AUD) exchange rate soon reversed its earlier gains.
Risk appetite rebounded on Wednesday, in spite of the odds of a December interest rate hike from the Federal Reserve remaining at a state of near-certainty. In large part the strength of the ‘Aussie’ (AUD) was thanks to an impressive rally in iron ore, with base metal prices continuing to climb on hopes of increased US infrastructure spending. Nevertheless, the bullishness of the antipodean currency remains fragile, particularly ahead of the release of the Fed’s November meeting minutes.
GBP AUD Exchange Rate Forecast: Prospect of Fed Tightening Likely to put Limited Downside Pressure on ‘Aussie’
Chancellor Philip Hammond’s first Autumn Statement could provoke further Sterling softness, if the budget fails to show any particular fiscal stimulus measures. With a certain level of uncertainty hanging over the domestic economy markets are unlikely to react well if Hammond does not row back on more of George Osbourne’s austerity policies.
Although no change is expected from the second estimate of the UK’s third quarter GDP this could nevertheless offer the GBP AUD exchange rate some support. Indications of continued economic strength could boost the appeal of the Pound, even if the future of the domestic economy remains less than certain.
Market risk sentiment will remain the primary driver of the Australian Dollar in the near future, with bullish commodity prices likely to keep the antipodean currency on a stronger footing against rivals. Even if the Fed remains on track to raise interest rates before the end of the year the ‘Aussie’ may not come under particular pressure, given the already-high pricing of imminent tightening.
Any Fed move is unlikely to impact the outlook of the Reserve Bank of Australia (RBA) at this stage. The RBA looks set to remain on hold for the foreseeable future, as Sean Callow, research analyst at Westpac, noted:
‘The RBA said its “forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years. Westpac expects that the “somewhat mixed” labour market – rather than inflation – will be key to whether there is any further easing in 2017.’
Current Interbank Exchange Rates
At the time of writing, the Pound Australian Dollar (GBP AUD) exchange rate was slumped at 1.66, while the Australian Dollar Pound (AUD GBP) pairing was making gains in the region of 0.59.
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