- Sharp increase in UK exports bolstered Pound Sterling – Hopes raised for stronger second quarter GDP
- Positive construction figures failed to maintain GBP/AUD exchange rate gains – ‘Brexit’ uncertainty continued to exert downside pressure
- Australian Dollar rallied ahead of US consumer confidence data – Weakening sentiment predicted to boost risk appetite
- UK inflation forecast to climb from 0.3% to 0.4% in May – GBP/AUD exchange rate could strengthen on bullish outlook
Slump in Chinese Inflation Weighed on Australian Dollar (AUD) Demand
Over the course of this week the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate has fluctuated between lows of 1.93570 and highs of 1.99459, a difference of 6 cents.
Although the Australian Dollar (AUD) had been on bullish form in the wake of the latest Reserve Bank of Australia (RBA) policy meeting, it was unable to maintain this trend on Thursday. Investors were prompted to move away from the antipodean currency after the Chinese Consumer Price Index for May fell short of expectations. The appeal of higher-risk assets sharply declined as inflationary pressure was shown to have eased on the year from 2.3% to 2.0%, raising fresh concerns over the possibility of a Chinese hard landing. With renewed signs of slowdown emerging from the world’s second largest economy the ‘Aussie’ came under pressure, in spite of the reduced likelihood of an imminent interest rate hike from the Fed.
Consequently, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate began to recover, climbing away from a one-month low of 1.9357. Although the RICS House Price Balance indicated softness in the UK housing market, the Pound returned to stronger form, with ‘Brexit’ fears temporarily eased by the extension of the voter registration deadline.
Demand for the Pound strengthened further in response to the April trade balance data, which showed an unexpected narrowing of the trade deficit. As exports grew at their strongest pace since records began in 1998 markets were inclined to conclude that the impact of referendum uncertainty had been more muted than initially thought, boosting confidence. Although there were rumbles of a possible legal challenge against the decision to give voters extra time to sign up for the referendum, this failed to particularly weigh on the Pound.
Stronger UK Constructed Failed to Keep Pound Sterling (GBP) on Uptrend
There was another upside surprise in store for the Pound in Friday’s Construction Output figures, which revealed that sector output had strengthened 2.5% on the month in April. Although the year-on-year result showed a continued contraction this nevertheless bettered forecast, prompting Sterling to trend higher against many of the majors. In addition to positive data earlier in the week, this raised hopes that the second quarter GDP could show a stronger rebound than previously anticipated.
While the BoE/TNS twelve month inflation forecast from May also demonstrated confidence in the outlook of the UK economy, however, the mood towards the Pound soon began to sour once again. Even though inflation expectations were pushed higher, from 1.8% to 2.0%, ‘Brexit’-based malaise returned to dampen the appeal of Sterling. With less than two weeks to go to the crucial vote, confidence in the Pound is likely to take an increasingly muted tone, even in the event of stronger domestic data.
Risk aversion began to ease somewhat on Friday morning, however, with expectations of a weaker University of Michigan Confidence Index offering fresh incentive to buy into commodity-correlated currencies. US Dollar (USD) softness thus gave a boost to the Australian Dollar, pushing the GBP/AUD exchange rate down in spite of a lack of Australian data ahead of the weekend.
GBP/AUD Exchange Rate Forecast: Pound May Rally on Stronger UK Inflation
Expectations point towards a strengthening of the UK CPI for May, with markets anticipating an uptick from 0.3% to 0.4% on the year. This would potentially reinforce the more bullish message of the BoE/TNS forecast, raising the odds of the Bank of England (BoE) voting to raise interest rates at some point in the foreseeable future. However, even if inflationary pressure is shown to be mounting, the primary influence on the Pound is likely to remain the EU referendum. As researchers at RBC Capital Markets noted:
‘Given the margin of error in opinion polls it seems fair to say that the campaign has been close all the way through as the tendency to hug a reasonably narrow range at or either side of 50/50. A clear breakout in the poll of polls from this established range would command market attention, but it is yet to happen.’
Tuesday’s Australian Consumer Inflation Expectation and NAB Business Confidence results are predicted to provoke ‘Aussie’ volatility, meanwhile. Should sentiment in the domestic economy show signs of improvement, the antipodean currency could return to stronger from against rivals, encouraging the likelihood of the RBA leaving interest rates on hold for longer.
Other UK reports to be aware of next week include the nation’s latest employment figures. Investors will be paying particular attention to the average earnings and employment change results.
Australian Dollar Forecast to Hit 40 Cents Vs. US Dollar
In other news, one industry expert has forecast that the Australian Dollar could fall to 40 cents against the US Dollar.
Vimal Gor of BT Investment Management stated:
‘This reliance on outside capital to fund our lavish lifestyle, which is still stuck in 2006, puts us in a very different situation to pretty much every country that is currently running a zero or negative interest rate policy. Economic growth in Australian dollars has been so weak for a number of years, even as real economic growth continues to show some pretty encouraging headline numbers […] This trend has deteriorated in the last year meaning we have to borrow from and sell assets to the rest of the world at a new, faster pace. He said that while the mining boom was in full force “everyone wanted to be Australia’s best friend”, but since the glory days had come to an end in 2014, the nation was more like “the little weedy kid no one wants on their team. […] A shock downside could easily see it move to 40c against the US Dollar if current trends continue, commodities fall to lows again and economic growth deteriorates.’
Current GBP, AUD Exchange Rates
At the time of writing, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate was trending lower around 1.9476, while the Australian Dollar to Pound Sterling (AUD/GBP) pairing was making gains in the region of 0.5133.