Disappointing UK Data on Friday Allows Australian Dollar to Pound Exchange Rate Recovery
Despite market disappointment in the Reserve Bank of Australia’s (RBA) persistent caution, the Australian Dollar to Pound (AUD/GBP) exchange rate could end the week relatively closely to its opening levels.
AUD/GBP opened at the interbank level of 0.5616 on Monday and after fluctuating earlier in the week the pair trended near 0.5610 again during Friday’s European session.
Thanks to a lack of market demand for the embattled Pound (GBP), AUD/GBP has been able to recover from Thursday’s post-Brexit vote low of 0.5559.
Sterling saw some late-week losses as investors reacted to Friday’s disappointing UK industrial production and trade deficit results from December.
UK industrial production was forecast to contract at -0.9% month-on-month, but instead tumbled to -1.3%. The year-on-year figure slowed to a stagnant 0.0% rather than the expected 2.6%.
Britain’s trade deficit deepened from £-3.65b to £-4.896b in December.
The data concerned some investors that Britain’s economy may not have been as sturdy in late-2017 as expected, with some analysts suggesting Britain’s growth could be revised lower as a result.
Australian Dollar (AUD) Exchange Rate Strength Limited by RBA’s Quarterly Statement
The Reserve Bank of Australia (RBA) published its quarterly monetary policy statement during Friday’s Asian session and the details of the report dampened market hopes for the RBA to take a more hawkish tone on monetary policy any time soon.
As a result, the Australian Dollar (AUD) saw mixed movement towards the end of the week.
In its latest statement, the RBA maintained a cautious ‘wait and see’ approach, despite acknowledging that Australia’s job market had recently performed better than expected and upgrading its forecasts for the unemployment rate.
As the bank has also indicated that it intends for inflation to reach the middle of its target band before any action on monetary policy is taken, RBA interest rate hike bets fell.
Many economists who previously forecast one or two RBA interest rate hikes for 2018, are now predicting the bank will leave policy frozen until 2019.
According to analysts from ANZ Bank;
‘…the Bank thinks “that progress is likely to be only gradual.” Critically, “a lift in wage growth is likely to be necessary for inflation to average around the midpoint of the 2-3 per cent medium-term inflation target.” We think it important that Governor Lowe specifically referenced the midpoint of the target range.’
The statement was published alongside Australia’s latest home loans and investment lending prints, which disappointingly contracted at -2.3% and -2.6% respectively.
Pound (GBP) Exchange Rates Give up Gains as Brexit Concerns Persist
On Thursday, the Pound briefly saw a surge in demand as the Bank of England (BoE) took a more hawkish tone on its monetary policy outlook.
However, as the bank’s hints at a faster pace of UK interest rate hikes relied on the Brexit process going smoothly and UK growth remaining solid, Sterling was unable to hold its highs for long.
Uncertainties about whether UK-EU Brexit negotiations will go smoothly, as well as recent underwhelming UK data, have caused concerns that the BoE may still be a ways away from tightening UK monetary policy.
Australian Dollar to Pound (AUD/GBP) Forecast to React to Australian Employment Stats
The Australian Dollar to Pound (AUD/GBP) exchange rate’s movement could be busier next week, as key economic data from Australia and Britain will be published.
Tuesday will see the publication of Australia’s January business confidence survey from NAB, followed by Westpac’s February consumer confidence data on Wednesday.
Britain’s January Consumer Price Index (CPI) results will be published on Tuesday too, but with Brexit uncertainties still in focus these may not have as much influence over the Pound outlook as usual.
Instead, the biggest focus for AUD/GBP investors next week will be potential Brexit developments as well as next Thursday’s Australian job market results from January.
If Australia’s job market continues to exceed expectations, it could cause Reserve Bank of Australia (RBA) interest rate hike bets to rise again.