In spite of the Fed’s decision not to raise interest rates this month, the Australian Dollar to Pound Sterling (AUD/GBP) exchange rate remained on a weaker footing.
Markets experienced an unpleasant shock recently when the first quarter Australian Consumer Price Index showed an unexpected decline. Inflationary pressure had been forecast to hold steady at 1.7% on the year at the start of 2016, however the CPI instead printed at 1.3%. This was a sharp disappointment for investors, suggesting that the domestic economy was not as robust as had been previously thought. As a result, markets were inclined to revise their expectations for the monetary policy outlook of the Reserve Bank of Australia (RBA).
As Sean Callow, research analyst at Westpac, notes;
‘The RBA tolerates both undershooting and overshooting its 2-3% y/y target band but with our economists’ initial estimate for core inflation in Q2 holding at 1.5% y/y, the risks are that inflation will stay lower for longer, potentially weighing on public expectations and wage agreements. So while Westpac is sticking to its call for no change in the cash rate on Tue, we can appreciate why the market scrambled to price in a 60% chance of a rate cut, from just 10-15% pre-CPI.’
With the odds of an interest rate cut at next week’s policy meeting boosted, the ‘Aussie’ (AUD) slumped sharply across the board on Tuesday, hitting a seven-week low of 0.5203 against the Pound (GBP).
This poor showing was not mitigated by the UK’s latest GDP report, despite signs of a slowdown in economic growth. In the first quarter GDP slowed from 0.6% to 0.4%, with significant downside pressure from market volatility and ‘Brexit’-based uncertainty. Growth on the year held steady at 2.1% , however, with continued optimism regarding the outcome of the EU referendum helping to keep the Australian Dollar to Pound Sterling (AUD/GBP) exchange rate on a downtrend.
Demand for the antipodean currency somewhat recovered on Thursday after the Federal Open Market Committee (FOMC) opted to leave interest rates unchanged. While policymakers did not rule out a June rate hike, the meeting was nevertheless regarded with relative dovishness, prompting the US Dollar (USD) to soften across the board. With commodity prices and risk appetite consequently boosted, this prompted the Australian Dollar to recover some of its lost strength.
Confidence in Pound Sterling wavered in response to the April Nationwide House Prices survey, which indicated a sharper slowing in the domestic housing market than investors had expected. Property prices slowed from 5.7% to 4.9% on the year, indicating that recent market uncertainty had impacted the UK economy more widely. Nevertheless, in spite of this weaker showing and a group of eight economists pledging their support for the ‘Leave’ campaign, the Pound did not remain out of favour for long.
Friday’s Australian Private Sector Credit figures could offer some greater support to the ‘Aussie’, assuming continued strength in credit growth that points towards more positive domestic sentiment. However, the appeal of the Australian Dollar is largely expected to remain muted ahead of the weekend and the RBA’s May policy meeting.
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