The outlook for GBP AUD has grown increasingly positive in the past week with markets anticipating a possible shift in the Brexit negotiation deadlock following UK Prime Minister Theresa May’s speech on Friday and growing hawkish sentiment within the Bank of England (BoE).
Theresa May’s Brexit Speech – What can Markets Expect for GBP AUD?
Theresa May’s Brexit speech in Italy on Friday could represent an ‘open and generous offer’ to the European Union according to a Cabinet Minister, though there remains a great deal of speculation about what the speech will actually entail.
Some have speculated that the speech will feature mention of a proposed £20bn to be paid to the EU in segments in replacement of the ‘divorce bill’. Others, however, have suggested that the speech will outline exactly what type of Brexit the Prime Minister is gunning for, whether it’s one that uses the framework of agreements between the EU and Switzerland or whether it will be entirely bespoke.
Some worry that if the speech features a shift towards a hard-line ‘cliff-edge’ Brexit then it might spook the markets, prompting the Pound to drop in demand.
Ultimately, however, the speech is intended to quell uncertainty and if it succeeds in this fashion then the Pound will likely grow stronger, as uncertainty remains the biggest sticking point in UK investment (currently preventing businesses from accurately planning long-term).
RBA Outlook Slow and Steady, AUD Falls
The Pound Australian Dollar exchange rate soared in the early hours of this morning as Reserve Bank of Australia (RBA) Governor Philip Lowe made a series of mixed sentiment comments.
Whilst Lowe claimed that borrowers ‘should prepare for higher interest rates’, he also insisted on patience in regards to the timing, asserting that ‘it’s some time before an interest rate rise will occur’.
He also asserted that rising global interest rates would not necessarily have automatic implications for stricter monetary policy within Australia, but that an increase – from the US Fed, for example – would have visible implications over time.
This added further evidence to the assessment that the RBA will steer away from a rate hike this year; sentiment that quickly drove demand away from the ‘Aussie’ Dollar, (especially with the ‘Greenback’ surging in the wake of hawkish comments from the Fed at last night’s meeting).
BoE Outlook Becomes Increasingly Hawkish, GBP forecast Positive
The outlook for GBP AUD has also increased on a progressively hawkish shift from members of the BoE.
This shift was initially caused by a jump in UK inflation, which accelerated in growth at a faster pace than originally anticipated and prompted various BoE members to turn hawkish, including BoE Governor Mark Carney, who recently stated:
‘If the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target’.
In this respect markets are slightly more optimistic regarding the BoE than the RBA, as the BoE could conceivably be seen raising rates slightly before the end of 2017