- Surprise dip in Australian inflation prompted AUD slump
- New Zealand Dollar rallied after RBNZ held interest rates
- Weaker UK data knocked Pound off bullish run
- GBP/AUD forecast to trend higher ahead of RBA policy decision
Raised Odds of RBA Rate Cut Dented Demand for Australian Dollar (AUD)
The appeal of the Australian Dollar (AUD) has been largely muted after Wednesday’s unexpectedly poor domestic Consumer Price Index report. Australian inflationary pressure slipped from 1.7% to 1.3% on the year in the first quarter, a surprising disappointment that prompted the ‘Aussie’ to enter a sharp decline across the board.
Consequently the antipodean currency struggled to particularly regain ground against rivals, despite the Federal Open Market Committee (FOMC) opting to leave interest rates on hold for another session. While the decline of the US Dollar (USD) did offer some support to commodity prices and the softened ‘Aussie’, investors remained somewhat wary of the currency.
Markets were also prompted to re-evaluate the chances of the Reserve Bank of Australia (RBA) adopting a more dovish bias at its May policy meeting next week. The odds of an interest rate cut promptly rose, despite the more relaxed tone taken by policymakers earlier in the month. As Bill Evans, Chief Economist at Westpac, noted:
‘The RBA has consistently argued that inflation can drift outside the target zone in the near term as long as there is some comfort that it will move back within the zone in the medium term. Two years outside the zone would be unacceptable and would require a policy response.’
With the Australian economy showing signs of weakness there has been little substantial incentive to buy back into the ‘Aussie’, particularly as markets brace for a potential RBA interest rate cut on Tuesday. Even so the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate struggled to maintain its gains for long.
New Zealand Dollar (NZD) Boosted after RBNZ Refused to Cut Interest Rates
While there had been some speculation that the Reserve Bank of New Zealand (RBNZ) would choose to lower interest rates at its policy meeting on Wednesday this was ultimately proven unfounded. Markets were pleasantly surprised by this decision, even though the tone of the accompanying statement maintained the RBNZ’s easing bias. Although this prompted a sharp relief rally, as the ‘Kiwi’ (NZD) regained ground lost in advance of the meeting, researchers at ANZ noted:
‘In fact, we get the impression there was a deliberate attempt by the RBNZ to maintain a clear dovish tone today – perhaps recognising the possible NZD consequence of a more upbeat message.’
Despite the still-high chances of the central bank opting to slash interest rates at least once more in the coming year, the New Zealand Dollar remained on a generally stronger footing ahead of the weekend. The appeal of the currency was shored up further by a particularly strong improvement in the NBNZ Business Confidence Index for April, which jumped from 3.2 to 6.2.
With market risk appetite generally improved in the wake of further US data weakness, the Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate extended its downtrend on Friday. Even with expectations of further RBNZ easing to come, the underlying fundamentals of the New Zealand economy continued to inspire some greater measure of confidence in the currency.
Weaker UK GDP & ‘Brexit’ Worries Weighed on Pound Sterling (GBP) Exchange Rate
Pound Sterling (GBP) lost its bullish form from the start of the week after the first quarter UK GDP indicated that the domestic economy had slowed pointedly. This was largely blamed on uncertainty triggered by the announcement of the EU membership referendum, as investment and spending were generally deterred by ‘Brexit’ worries. With growth expected to remain muted ahead of the June vote this did not bode well for the outlook of the UK economy in the second quarter, and further dented the likelihood of the Bank of England (BoE) adopting a more hawkish tone in the near future.
Investors were further discouraged by a particularly sharp dip in the UK GfK Consumer Confidence Survey, which slipped from 0 to -3 in April. The less optimistic mood was compounded by an unexpected decline in Mortgage Approvals, reinforcing recent indications that the UK housing market has been slowing in recent months. As confidence over the outcome of the EU referendum is likely to waver over the coming weeks, downside pressure is expected to continue to weigh on the Pound.
Current GBP, AUD, NZD Exchange Rates
At the time of writing, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was trending lower at 1.9100, while the Pound Sterling to New Zealand Dollar (GBP/NZD) pairing was slumped around 2.0873. Meanwhile, the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate was on a downtrend in the region of 1.0929.
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