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Volatility Forecast for GBP AUD on Conservative Party In-Fighting

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The Pound Australian Dollar exchange rate could become increasingly volatile in the near-term as pressure grows for the Prime Minister to call a leadership election.

GBP Outlook Volatile on Potential Conservative Coup

Grant Shapps, previous Tory Chairman of three years has now emerged as the ringleader of a backbench effort to push for UK Prime Minister Theresa May to step down, it was revealed on BBC Radio 4 this morning.

Shapps asserted that the answer to what himself and various other backbenchers have labelled a ‘leadership crisis’ is not to bury their ‘heads in the sand’.

Instead, he claimed that May should quit and call for a leadership election to prevent the Conservative Party from losing out during Brexit and in future polls.

Despite these calls Shapps has acknowledged that the group does not yet have a unified view on who ought to replace May as Prime Minister. Charles Walker, vice-chairman of the 1922 committee has also pointed out that Grant does not have much of a following within the party, and that the coup will likely ‘fizzle out’.

The markets (and indeed many Conservatives) fear a leadership contest would only exacerbate the current divide within the party – especially with Brexit negotiations continuing to wreak havoc.

Beyond this, the investors are worried that a leadership contest could simply pave the way for an election, thus resulting in even more instability and uncertainty.

In light of this news the Pound has not been able to capitalise on the Australian Dollar’s current weakness – something that will likely continue until these calls, again, diminish.

AUD Outlook Gloomy on Rallying USD

The Australian Dollar has remained weak today as a result of yesterday’s mixed data prints and the on-going strong performance of its US counterpart.

Whilst Australia’s trade surplus was revealed to have grown from A$808m to A$989m in August, their month-on-month retail sales dropped from -0.2% to -0.6% (rather than growing as forecast to 0.2%) and their performance of construction index dropped from 55.3 to 54.7.

This news hurt demand for the ‘Aussie’ Dollar, with the currency already reeling in the wake of the fresh Republican tax reform news and the shrinking US trade deficit; both of which cemented the US Dollar’s gains, making it the more attractive option.

Whether this will continue, however, is debatable.

Whilst the Republicans have successfully initiated the first step in the process, with the House of Representatives approving the 2018 fiscal spending blueprint (containing what is essentially the legislative tool to enable Republicans to eventually pass the bill), there remains a number of hurdles to clear.

Many investors continue to be worried that the tax reform bill will not make it through congress; an eventuality that could enable AUD to re-assert itself.

Imminent US Data Releases Liable to Cause Volatility for GBP AUD

Today’s US non-farm payroll figures for September are imminent, as well as their employment figures, average hourly earnings and the consumer credit reading, which is due this evening.

Non-farm payrolls are expected to drop in September from 156k to 90k, an event that, should it occur, could give the ‘Aussie’ Dollar the breathing room it needs to climb.

Despite this, the US unemployment rate in September is forecast to remain steady at 4.4% and average hourly earnings are forecast to increase from 0.1% to 0.3% – two prints that could outweigh a poor non-farm payroll performance.