Rejection of May’s Brexit Plan Fails to Drive Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Lower
The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate rebounded on Wednesday morning in spite of MPs voting down Theresa May’s updated Brexit deal.
While this move raises fresh uncertainty over the future of the UK’s relationship with the EU the mood towards Pound Sterling (GBP) turned generally positive.
Markets are optimistic that Parliament will also vote against leaving the EU without a deal, increasing the prospect of an extension to the Article 50 deadline and reducing the risk of a cliff-edge exit.
This optimism encouraged GBP exchange rates to recover some of their recent losses, even though it remains to be seen what will come of May’s latest defeat.
Brexit Uncertainty Still Set to Limit GBP/AUD Exchange Rate Upside
Even if MPs vote to rule out the prospect of the UK leaving the EU without a deal, however, the mood towards the Pound could still sour.
As long as a lack of clarity continues to hang over the UK economy the GBP/AUD exchange rate could struggle to hold onto a stronger footing.
A prolonged period of uncertainty may put additional pressure on economic activity, raising the risk of the UK gross domestic product losing fresh momentum in spite of recent consumer optimism.
Until there are signs of progress towards a mutually agreeable deal on the Irish border issue the Pound remains vulnerable to a fresh bout of weakness.
Further political turmoil may also weigh heavily on GBP exchange rates in the days ahead.
Weaker Inflation Expectations to Limit Australian Dollar (AUD) Strength
Demand for the Australian Dollar (AUD), meanwhile, could diminish if March’s consumer inflation expectation survey proves underwhelming.
Signs that inflationary pressure within the Australian economy is easing would leave AUD exchange rates on the back foot, given the cautious outlook of the Reserve Bank of Australia (RBA).
Any slowdown in inflation could give RBA policymakers greater cause for dovishness, further diminishing the prospect of interest rates rising any time soon.
A weaker showing here may increase the odds of a RBA interest rate cut, to the detriment of the Australian Dollar.
Worries over the global growth outlook could also limit the strength of AUD exchange rates, with the US and China still looking no closer to a fresh trade agreement.
With the Chinese economy already showing signs of slowing the Australian Dollar looks set to remain on a weaker footing in the near future, given its status as a proxy from Chinese growth.
Unless Chinese data surprises to the upside ahead of the weekend the mood towards the Australian Dollar may remain muted, putting a floor under the GBP/AUD exchange rate for the time being.