Deep Second Quarter Growth Contraction Fuels Pound Australian Dollar (GBP/AUD) Exchange Rate Gains
As the Australian economy slid into recession in the second quarter the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate remained on a positive footing.
While forecasts had pointed towards a weak quarter of growth for the economy investors were still caught off guard by the extent of the slowdown, which clocked in at -7% on the quarter.
Following on from the -0.3% contraction seen in the first quarter this weak reading pushed Australia into a state of technical recession for the first time in twenty-nine years.
This decline highlights the extent of the Covid-19 pandemic’s impact on the economy, offering clear evidence of the challenges still facing Australia in the remainder of the year.
As a result, with market risk appetite also generally deteriorating, the Australian Dollar (AUD) was left on the back foot against its rivals on Wednesday.
Australian Dollar (AUD) Exchange Rates Vulnerable to Narrowed Trade Balance
Further Australian Dollar weakness could come on the back of July’s trade balance figure, with markets anticipating another disappointment.
Although investors expect to see the trade balance remain in a state of surplus any narrowing of the figure may boost the GBP/AUD exchange rate.
As the global disruption stemming from Covid-19 continues to unfold confidence in the outlook of the Australian economy is unlikely to improve.
With the economy already in a state of decline any further deterioration in trade conditions could fuel bets of growth remaining lacklustre for longer.
The mood towards the Australian Dollar could also sour in response to the latest Chinese services PMI.
Unless the Chinese economy can demonstrate greater signs of shaking off the impact of the pandemic a persistent sense of market risk aversion looks set to weigh on AUD exchange rates.
Solid UK Services PMI Set to Shore up Pound Sterling
Demand for Pound Sterling (GBP), meanwhile, may improve if August’s finalised UK services PMI performs as forecast.
Confirmation that the service sector delivered a strong monthly expansion, marked by a PMI reading of 60.1, could give investors fresh incentive to buy into the Pound.
While the initial impact of the PMI report has already passed, thanks to the initial reading, a solid showing here could still give the GBP/AUD exchange rate a boost.
On the other hand, any negative revision to the PMI report could leave the Pound exposed to renewed selling pressure.
As the service sector remains the primary driving force of the UK economy any signs of faltering here may put a dent in the Pound.
Until markets can see reason to bet that the economy will bounce back in the coming quarters, shaking off both Covid-19 disruption and the spectre of a no-deal Brexit.