Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Benefits from UK Services PMI Improvement
A better-than-expected UK services PMI helped to keep the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate on a steady footing on Wednesday.
Picking up from 50.4 to 51.0 in May, showing modest expansion on the month, the service sector defied the sharp loss of momentum seen in the corresponding manufacturing and construction surveys.
This suggests that the UK economy did not suffer such a significant setback last month, even though hopes for the strength of the second quarter gross domestic product remain limited.
As Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, commented:
‘The sector experienced the strongest, albeit still modest improvement in overall activity since February this year after a weak couple of months. However, before we bring out the bunting, a reality check is in order, as the underlying figures are still weak. Service businesses are still grappling with Brexit uncertainty, a weaker UK economy and rising operating costs.’
With investors relieved by the lack of a third disappointing PMI the downside pressure on Pound Sterling (GBP) eased, in spite of a persistent sense of political uncertainty.
Weak Australian GDP Limits Australian Dollar (AUD) Appeal
Demand for the Australian Dollar (AUD) remained generally limited, meanwhile, in the wake of the first quarter Australian gross domestic product data.
As anticipated, the headline growth rate eased from 2.3% to 1.8% on the year, adding to existing worries over the underlying health of the economy.
With global trade tensions continuing to mount the Australian economy looks vulnerable to a further loss of momentum in the second quarter, raising the risk of further Reserve Bank of Australia (RBA) dovishness.
Markets are now pricing in higher odds of the central bank cutting interest rates to a fresh record low before the end of the year, loosening monetary policy in response to lacklustre unemployment data.
However, the increasing odds of the Federal Reserve also adopting a dovish policy outlook helped to prevent AUD exchange rates seeing any major losses at this stage.
GBP/AUD Exchange Rate Set for Volatility on BoE Governor Comments
Comments from Bank of England (BoE) Governor Mark Carney could provoke further volatility for the GBP/AUD exchange rate in the near future.
If Carney expresses a greater sense of caution in the wake of May’s underwhelming set of UK PMIs the mood towards the Pound is likely to sour.
While Brexit-based uncertainty looks set to keep the BoE’s hands tied for the foreseeable future any signs of dovishness over the economic outlook could weigh heavily on GBP exchange rates.
On the other hand, if Carney signals a degree of confidence this may help to shore up demand for the Pound in the short term.
As long as political jitters continue to hang over the UK economy, however, the strength of the GBP/AUD exchange rate is likely to prove limited.
The risk of a hard-line Brexiteer succeeding Theresa May as Prime Minister could keep the Pound on a bearish bias for some weeks to come.