The Pound has risen by 0.5% against the Australian Dollar today, but the GBP/AUD exchange rate could slip in the near-term if Brexit talks get off to a shaky start.
Theresa May is due to trigger Article 50 on Wednesday, which will officially get Brexit underway. While some industry experts believe that the Pound will be damaged by the news, it may only be the tip of the iceberg if talks fail to go smoothly.
Among the pressing issues to be discussed is the need to ensure the security of EU citizens in the UK and vice versa. Additionally, the contentious matter of the UK’s access (or lack of access) to the EU single market needs addressing; this may start negotiations with EU officials off on a sour note, especially if UK diplomats adopt a stubborn attitude.
Any signs that the UK may be getting a ‘bad deal’ are likely to weaken the Pound.
A factor likely to affect the Australian Dollar in the near future will be the Reserve Bank of Australia (RBA). Specifically, the RBA’s response to the Australian housing situation could have a strong influence on demand for AUD exchange rates.
It is broadly accepted that a housing bubble is forming in key Australian cities like Sydney and Melbourne. Unfortunately for the RBA, however, high levels of household debt have prevented the central bank from responding to the situation.
Highlighting the problem has been Pimco Sydney Managing Director Rob Mead;
‘[Households are now] highly sensitive to even small upward changes in the cash rate. We used to [appreciate] the fact that [the RBA] had such a direct transmission mechanism to the cost of borrowing. As you lowered rates the benefit to the borrower was immediate.’
Now, however, Mead states that;
‘What we have now is a central bank that is somewhat trapped, in the sense that while we have had a big build-up in household leverage, it’s been taking place at lower and lower rates’.
This means that the RBA may be unable to raise interest rates as it would harm those who had borrowed at lower rates, but also cannot cut as this would trigger more borrowing at even lower rates.
If this difficulty is reflected in the early April RBA interest rate decision, then the Australian Dollar is likely to drop against the Pound.
Recent Interbank GBP AUD Exchange Rates
At the time of writing, the Pound to Australian Dollar (GBP AUD) exchange rate was trading at 1.65 and the Australian Dollar to Pound (AUD GBP) exchange rate was trading at 0.60.
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