- Pound Sterling Australian Dollar Rises to 1.6474 – Australian Dollar to Pound hits 0.6097
- Transitional Brexit Talks Waylay Investor Anxieties – Prompts Sharp Jump in Demand for Sterling
- Australian YoY Producer Price Index Increases – Australian Dollar Claws back some Losses
The Pound surged against the Australian Dollar today as UK Finance Minister Philip Hammond made it clear that the UK isn’t necessarily heading for a ‘hard Brexit’.
Hammond announced that he wanted to avoid a ‘cliff-edge’ wherein things like the freedom of movement and access to the single market would be abruptly stopped. He instead voiced proposals of a transitionary period after 2019.
He spoke on BBC Radio 4’s Today programme:
‘I think there is a broad consensus that this process has to be completed by the scheduled time of the next general election, which is in June 2022, so a period of at the most three years in order to put these new arrangements in place and move us on a steady path without cliff edges from where we are today to the new long-term relationship with the European Union’.
Many investors considered this to be good news for Sterling given the general perception that a hard Brexit and specifically an exit from the EU’s single market would be a risk for the UK and it’s currency– especially if no other significant trade deals are yet setup. Indeed, Hammond’s comment assuaged this fear, causing the Pound to spike against the ‘Aussie’ Dollar.
Market Risk Appetite Reduces Australian Dollar (AUD) Demand
The Australian Dollar has struggled lately, primarily due to a general decline in market risk appetite caused by recent extremely positive US goods data and overtly dovish sentiments from Reserve Bank of Australia (RBA) officials.
The US goods data increased the perceived likelihood that the US Federal Reserve will hike rates one more time this year, limiting the near-term upside potential of the antipodean currency.
The RBA on the other hand has continued to maintain a neutral/dovish sentiment, especially after Australian Q2 inflation levels disappointed.
Deputy Governor of the RBA Guy Debelle recently put a halt to near-term rate hike speculation, stating: (in regards to the recent meeting minutes) ‘No significance should be read into the fact the neutral rate was discussed at this particular meeting’.
RBA Governor Philip Lowe, similarly to Guy Debelle, acknowledged the issue of inflation levels being below target, but he also spoke out against the possibility of both rate cuts and hikes, asserting that making further cuts to try and jump-start inflation would risk wreaking havoc on household debt and asset prices.
On the data front, Australia did receive some somewhat positive news today in the form of year-on-year producer prices, which increased from 1.3% to 1.7% in June. This was, however, not significant enough to provoke much movement within this pairing, especially with the Reserve Bank of Australia maintaining its recent neutral/dovish outlook.
GBP AUD Forecast: Sterling Surge Possible with RBA Remaining Dovish
Demand for both currencies is likely to remain volatile next week as both the UK and Australia delivering their respective August policy decisions.
Markets currently expect Bank of England (BoE) policymakers to remain divided on the subject of interest rates, however should more members of the Monetary Policy Committee express hawkish sentiment than anticipated demand for the Pound could surge.
As previously mentioned, however, the RBA has explicitly expressed its intentions to keep rates on hold. If this proves true then Sterling could capitalise on their dovishness, especially as the BoE remains split.
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