Bank of England’s Brexit Recession Warning Drags Down GBP/AUD Exchange Rate
As the Bank of England (BoE) warned that the UK faces a one in three chance of a Brexit recession the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate entered a renewed downtrend.
Although the BoE opted to leave interest rates on hold at its August meeting, as widely anticipated, this lack of action failed to support Pound Sterling (GBP).
While policymakers lowered their growth forecasts the BoE maintained its assumption of a smooth Brexit scenario, in spite of recent political developments.
With markets pricing in much higher odds of a no-deal Brexit there appears a risk of the BoE having to make a more significant policy adjustment in the future.
The mood towards the Pound also softened in response to July’s UK manufacturing PMI, which held steady at 48.0 on the month as sector activity remained at a six-and-a-half year low.
As confidence in the outlook of the UK economy continued to decline this left GBP exchange rates with little in the way of support.
Australian Manufacturing Surprise Boosts AUD Exchange Rates
The mood towards the Australian Dollar (AUD), meanwhile, picked up as July’s Australian manufacturing PMI bettered forecasts.
Investors took encouragement as the index leapt from 49.6 to 51.3 at the start of the third quarter, indicating that the sector returned to a positive state of growth.
This stronger showing helped to ease concerns over the underlying health of the Australian economy, also limiting the impact of the less dovish Federal Reserve policy announcement.
Although the US central bank signalled its intention to leave interest rates on hold on the months ahead the downside pressure on AUD exchange rates was limited by an improved Chinese manufacturing PMI.
With the world’s second largest economy demonstrating renewed signs of resilience the appeal of the risk-sensitive Australian Dollar naturally improved.
A solid rebound from Friday’s retail sales data could see AUD exchange rates gain an additional boost.
Signs of Construction Sector Improvement May Limit Pound Downside
Markets are hoping to see an improvement in July’s UK construction PMI, given the dismal reading of 43.1 seen in June.
While the construction sector only accounts for a small fraction of the UK gross domestic product any signs of improvement here could buoy the Pound against its rivals.
Greater focus is likely to centre on Monday’s services PMI, however, as investors look for signs that the UK’s economic engine recovered some of its momentum.
If the PMI falls into a state of contraction, though, this could see the GBP/AUD exchange rate move towards a fresh multi-month low.
Political developments could equally weigh on GBP exchange rates in the days ahead, with investors still betting on the possibility of an imminent general election.
As long as the UK remains on course to crash out of the EU without a deal in October, however, the GBP/AUD exchange rate looks set to maintain a bearish bias.