Thursday’s UK general election didn’t go as most investors and betters were expecting, ending with a ‘hung parliament’. This essentially means whichever party takes power will be weaker than a majority government, which has made Pound investors very anxious.
GBP AUD has lost over four cents in value this week. On Friday the pair briefly touched on a low of 1.6797, its lowest level since April.
Pound (GBP) Outlook Undermined on Uncertainty of Hung Parliament
The Pound plummeted on Thursday evening and Friday morning as investors’ bets of a Conservative majority in the UK election missed the mark. Exit polls on Thursday evening indicated that Britain was headed for a hung parliament and exit polls were right.
Markets had been hoping for a big Conservative majority, as a stronger Conservative government would potentially make for a smoother Brexit process with less opposition to the party’s negotiation stances.
However, a hung parliament inevitably means a weaker party. Faith in UK Prime Minister Theresa May has faded among politicians and economists as May’s plan to secure a bigger majority backfired.
Sterling rebounded slightly from its worst levels on mutterings that Theresa May would aim to make a minority government, but overall the currency’s outlook has worsened due to expectations that Britain’s ruling government will now be weaker either way.
If the Conservatives fail to create a government on Friday, hung parliament negotiations could go well into next week.
On the other hand, if the week ends with a weaker Conservative party, perhaps with the informal (or formal) support of the Democratic Unionists Party (DUP), Sterling will recover from its worst levels.
Analysts generally agree that regardless of the outcome of hung parliament negotiations, Britain’s economic outlook has worsened now as the smaller ruling party will have a harder time passing economic policies. This could keep Sterling from recovering all of this week’s losses.
Australian Dollar (AUD) Benefits from Pound Plunge
Despite being a risky currency that typically weakens in times of market volatility, the Australian Dollar easily benefitted against a plunging Pound on Thursday and Friday.
With investors now concerned about Britain’s political and economic outlooks, the Australian Dollar looked comparatively more appealing. Australia’s higher interest rates means the ‘Aussie’ has higher yields than the Pound.
Recent Australian data has been generally strong in the past week too. Australia’s growth was more resilient than expected in the first quarter of 2017.
The Reserve Bank of Australia (RBA) has also been generally optimistic about Australia’s growth outlook.
However, AUD strength has been limited. The nation’s latest trade balance report was concerning and the rise of uncertainty in Britain has dampened market appetite for risky currencies like the ‘Aussie’.
While Sterling is most likely to drive GBP AUD exchange rate movement in the near future, next week’s Australian data could influence the ‘Aussie’ slightly.
Business and consumer confidence surveys will be published earlier in the week, with Australia’s key May employment report coming in on Thursday.
GBP AUD Interbank Rate
At the time of writing this article, the Pound to Australian Dollar exchange rate traded at around 1.69. The Australian Dollar to Pound exchange rate trended in the region of 0.59.
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