Australian Dollar Pound (AUD/GBP) Exchange Rate Benefits from Positive Services PMI
Despite the rising odds of imminent Federal Reserve policy action the Australian Dollar to Pound (AUD/GBP) exchange rate was able to gain ground at the start of the week.
Although the TD Securities inflation estimate failed to pick up as investors might have hoped this was not enough to significant dent demand for the Australian Dollar (AUD).
Investors were instead encouraged by a solid improvement in January’s Australian services PMI, which strengthened from 52.0 to 54.9.
This suggests that the service sector started 2018 on a stronger footing, something which the Reserve Bank of Australia (RBA) is likely to greet as a positive development for the longer-term economic outlook.
Even though markets are increasingly bracing for the possibility of the Fed raising interest rates four times over the course of the coming year, though, the mood towards the Australian Dollar remained positive.
Pound (GBP) Softens After UK Services PMI Falls Short of Forecast
The UK services PMI for January rounded out a disappointing set of economic data, offering further support to the AUD/GBP exchange rate.
While forecasts had pointed towards a slight easing in sector activity on the month markets were surprised to find that the measure had instead dipped from 54.2 to 53.0, hitting its lowest level since September 2016.
All in all, coupled with weaker-than-expected manufacturing and construction PMIs, this points towards the UK economy having lost some of its momentum at the start of 2018.
As researchers at TDS noted:
‘If these lower PMI levels hold through Q1, they do point to downside risks for H1 GDP growth, and leave our call for a May rate hike from the BoE much more uncertain. More clarity on Brexit should help to drive a bounce higher though.’
Fresh Brexit-based jitters also weighed on the Pound (GBP) during Monday’s European session, with investors discouraged by reports that the government is ‘categorically’ intending to pull the UK out of the EU customs union.
AUD/GBP Exchange Rate Forecast to Lose Ground Ahead of RBA Decision
Even so, the AUD/GBP exchange rate is unlikely to hold onto its gains this morning as anticipation builds for the latest Reserve Bank of Australia (RBA) policy decision.
Policymakers are not expected to take a more hawkish stance at this juncture, leaving the Australian Dollar vulnerable to downside pressure today.
Unless markets see reason to price in the prospect of an interest rate hike in the coming months AUD exchange rates are unlikely to find any particular support.
However, if the Australian trade balance returned to a state of surplus in December this could encourage some degree of confidence in the domestic outlook.
With the appeal of the Pound likely to remain limited in the near term, though, the AUD/GBP exchange rate may hold onto a stronger footing even so.