With risk aversion diminished in response to a stronger US Dollar (USD) the Australian Dollar to Pound Sterling (AUD/GBP) exchange rate trended higher ahead of the weekend.
While nobody had expected the Bank of England (BoE) to change interest rates at its May policy meeting the unanimous nature of the vote prompted some relief amongst markets. There had been worries that one, or even two, members of the Monetary Policy Committee (MPC) could stage a dovish rebellion and vote to cut rates. A downward revision of the central bank’s growth forecast was not enough to dampen the resultant Pound Sterling (GBP) rally, with investors also encouraged by the BoE’s stark warning on the risks of a ‘Brexit’ to the UK economy.
As Bas van Geffen, quantitative analyst for Rabobank, commented:
‘In the short-term, Carney admitted that signs that the EU referendum is starting to weigh on activity also make it harder to interpret UK macroeconomic and financial indicators. This is has caused the MPC to “[react] more cautiously to data releases than normally would be the case.”’
With that in mind markets were still inclined to view a 2016 interest rate hike as a possibility, assuming that the UK votes to remain within the EU. Consequently the Australian Dollar to Pound Sterling (AUD/GBP) exchange rate continued to trend lower, with investors lacking any incentive to favour the ‘Aussie’.
Confidence in the antipodean currency was eroded further following speeches from a trio of Federal Open Market Committee (FOMC) policymakers. Hawkishness was perhaps to be expected from Kansas City Fed President Esther George, who had voted for a rate hike in March and April. However, George’s assessment that interest rates are too low at present was echoed by both the Boston and Cleveland Fed Presidents. This encouraged speculation that the Fed could opt to raise interest rates sooner rather than later, prompting a sharp decline in demand for commodity-correlated currencies.
Despite the latest UK Construction Output report revealing an unexpectedly severe contraction of -4.5% on the year this did not prevent the Pound from extending its gains ahead of the weekend. While this weaker showing does not bode particularly well for the strength of the wider economy Sterling was supported by more ‘Brexit’-based commentary, this time from the IMF. As the fund warned of a potential housing and stock market crash in the event of the UK leaving the EU this increased optimism that voters will move towards the ‘Remain’ camp.
Next week the Pound is expected to return to bearish form in response to the UK Consumer Price Index. Inflationary pressure is forecast to have weakened from 0.5% to 0.4% on the year in April, a result which would dent the confidence in the outlook of the domestic economy. Although referendum uncertainty has likely had a detrimental impact on recent data this is not likely to stop the Pound from declining on the back of a disappointing figure.
Investors will be interested to see the May meeting minutes of the Reserve Bank of Australia (RBA), meanwhile, looking for further insight into policymakers’ surprise decision to cut interest rates. Should the possibility of another imminent cut be highlighted then the AUD/GBP exchange rate could see a strong downtrend in response.
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