Confidence in the Pound remained decidedly muted at the start of the week, allowing the AUD GBP exchange rate to make strong gains on improved market risk appetite.
Disappointing Chinese data weighed heavily on the Australian Dollar (AUD) ahead of the weekend, with the appeal of the commodity-correlated currency dented by fresh signs of weakness in the world’s second largest economy. Investors were also discouraged by the news that Australian credit card spending had fallen in June, undermining confidence in the robustness of the domestic economy by pointing towards softer consumer sentiment.
However, the Australian Dollar to Pound (AUD GBP) exchange rate soon recovered ground thanks to the persistent drag of Brexit-based uncertainty. Markets were unimpressed by the UK’s June Construction Output figures, which offered further evidence that the UK economy had been in a weaker position heading into the EU referendum. With output contracting -2.2% on the year there was little reason for investors to favour the ailing Pound (GBP).
A further boost to the AUD GBP exchange rate came in the form of the latest US data, which proved rather more discouraging than investors had anticipated. With Advance Retail Sales and the University of Michigan Confidence Index both falling short of forecast, the odds of the Federal Reserve opting to raise interest rates in the near future seemed to diminish. This led to a sharp boost in risk appetite, allowing the ‘Aussie’ to retake some of its lost ground.
Confidence in the antipodean currency was shored up further on during Monday’s European session thanks to a strong rally in iron ore prices. Even though demand from China would seem to have weakened recently this failed to prevent this uptick in commodity prices, leaving the ‘Aussie’ on a stronger footing against its rivals. Continuing dismissal of the chances of the Fed raising interest rates before the end of the year also benefitted the AUD GBP exchange rate, with markets in a generally risk positive mood.
Investors maintained a bearish attitude towards Sterling, meanwhile, with the latest Rightmove House Price Index offering little incentive to buy back into the weakened currency. The domestic housing market remained in a state of slowness in the wake of the Brexit vote, with prices contracting -1.2% in August to compound the previous month’s weakness. As a result the AUD GBP currency pair trended higher, climbing to a fresh two-year high of 0.5955.
The Australian Dollar may struggle to hold onto this strength, however, with Tuesday seeing the publication of the Reserve Bank of Australia’s (RBA) August meeting minutes. If policymakers are found to have expressed greater dovishness when discussing the loosening of monetary policy the antipodean currency is likely to return to a weaker footing. However, even if the RBA is found to be considering further cuts to interest rates this possibility could be forestalled by stronger domestic data, as Bill Evans, Chief Economist at Westpac, noted:
‘Over the course of the next few months we expect the “atmospherics” around the Australian economy to be boosted – a decent increase in employment growth with some drift down in the unemployment rate; more resilience in the east coast housing markets; and decent levels for both consumer confidence and business conditions.’
On the other hand, the AUD GBP exchange rate could find some support in the wake of the UK Consumer Price Index report for July. The first post-Brexit gauge of inflation is likely to provoke significant volatility for the Pound, with the potential to trigger a fresh round of uncertainty and easing fears. If the inflation data does prove discouraging then the appeal of Sterling is expected to diminish markedly.
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