UK Political Anxiety Fuels Pound Australian Dollar (GBP/AUD) Exchange Rate Slide
The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate saw a dramatic plunge as markets braced for the reconvening of UK parliament.
Speculation that a group of Conservative MPs could rebel in order to support a no-confidence vote left Pound Sterling (GBP) on the back foot.
The increasing odds of a snap general election only fuelled market fears of a potential no-deal Brexit scenario, however.
As less than two months now remain before the October Brexit deadline the risk of the UK crashing out of the EU without a deal has continued to mount.
Steady RBA Encourages Australian Dollar (AUD) Demand
On the other hand, the Australian Dollar (AUD) benefitted from the Reserve Bank of Australia’s (RBA) decision to leave interest rates on hold.
While the move was widely anticipated investors still took encouragement from the tone of Governor Philip Lowe’s accompanying commentary.
As Lowe signalled cautious optimism in the improvement of the domestic housing market, which could support a wider economic recovery, AUD exchange rates picked up.
With other central banks still leaning towards dovishness this signal of confidence, however cautious, encouraged a fresh bout of Australian Dollar gains.
Resilient UK Services PMI Forecast to Limit GBP Exchange Rate Weakness
Although political developments are likely to dominate the mood towards the Pound for the foreseeable future the latest UK services PMI could offer a boost.
As the service sector is responsible for more than three quarters of the UK gross domestic product a positive showing here could encourage confidence in the wider economic outlook.
However, if the services PMI fails to demonstrate an acceleration on the month this could leave GBP exchange rates vulnerable to additional losses.
Unless the service sector can deliver strong growth in the third quarter the risk of the UK entering a technical recession will remain.
Second Quarter Gross Domestic Product Set to Drive AUD Exchange Rates
AUD exchange rates, meanwhile, could gain further ground on the back of the second quarter Australian gross domestic product report.
Another solid month of economic growth would ease concerns over the negative impact of deteriorating global trade conditions, to the benefit of the Australian Dollar.
With the quarterly growth rate forecast to improve from 0.4% to 0.5% investors could find fresh reason to buy into the ‘Aussie’ on Wednesday.
However, if growth fails to pick up as anticipated this would leave AUD exchange rates exposed to selling pressure.
Signs of increasing economic weakness may help the GBP/AUD exchange rate to recover some of its lost ground in the near term.