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GBP/AUD Exchange Rate Forecast; Will February Round of Markit PMIs Bring Bad News for UK Economy?

Pound Sterling Currency Forecast

February UK PMIs Could Weaken GBP/AUD Exchange Rate if Results Suggest Gloomy Economic Forecast

Another round of purchasing manager’s indices for the UK is set to be released in the coming fortnight and could give the GBP/AUD exchange rate cause to slump.

Thursday 1st March will see IHS Markit release its manufacturing PMI for February, followed on Friday 2nd by the construction index and on Monday 5th by the vital services and composite measures.

January PMIs all significantly disappointed forecasts, with the manufacturing index falling from 56.2 to 55.3, the construction index dropping from 52.2 to a near-contraction score of 50.2 and the services index weakening from 54.2 to a 16-month low of 53.

This prompted Chris Williamson, Chief Business Economist at IHS Markit, to state;

While the fourth quarter PMI readings were historically consistent with the economy growing at a resilient quarterly rate of 0.4-0.5%, in line with the recent GDP estimate, the January number signals a growth rate of just under 0.3%.’

With a full set of February PMIs due to have been published within the next two weeks, economists will then have two-thirds of the first-quarter PMIs in their possession and can therefore make a much more accurate estimate of GDP at the start of 2017.

If the February indices weaken or remain around the levels hit in January, this would signal a notable slowdown for the UK economy at the beginning of the year and could raise fears that this will persist over the coming months.

As well as weighing on the overall economic outlook, another set of poor PMIs could undermine expectations that the Bank of England (BoE) is set to hike interest rates in the near-term.

Markets are largely expecting the Monetary Policy Committee (MPC) to hike interest rates in May and Governor Mark Carney indicated this week that the BoE may now need to raise borrowing costs three times before the end of 2020, rather than the two projected just a few months ago.

Can GBP/AUD Exchange Rate Benefit from Further Political Jitters after Australian Deputy PM Joyce Quits?

Markets were reminded this week of Prime Minister Malcolm Turnbull’s fragile grip on the Australian parliament, with the GBP/AUD exchange rate able to make soft gains, after Deputy Prime Minister Barnaby Joyce resigned.

Joyce, who was leader of the National Party, which supports Turnbull’s Labour Party as coalition partners, bowed to pressure from inside and outside of his party after it emerged he began an affair with his current partner Vikki Campion back when she worked as his media advisor.

There are questions regarding whether Joyce broke ministerial code when pursuing his relationship with Campion; in particular regarding her securing of two unadvertised jobs within the National Party.

This caused jitters for the Australian Dollar because the coalition only gives Turnbull a one-seat majority in Parliament.

Joyce remains a member of the party and retains his seat, so Turnbull for now narrowly clings onto power, but this scandal could have further implications – especially if Joyce is found to have breached code.

There have also been allegations of sexual harassment against the former Deputy Prime Minister, so there remain risks that he will be dismissed or leave the party completely, taking Turnbull’s majority with him and leaving a turbulent political landscape in his wake.