The Australian Dollar to Pound Sterling (AUD/GBP) exchange rate sailed upward last week thanks to a dovish Federal Reserve and investor distaste for a weakening Pound.
Despite an upcoming Reserve Bank of Australia (RBA) announcement to content with, the ‘Aussie’ enjoyed last week’s risk-on movement with the rest of its commodity bloc peers.
The already-weakened Pound was unable to find many footholds when Federal Reserve Chairwoman Janet Yellen sent risk appetite sky-high with her dovish outlook for the US central bank.
Investors swept into risky commodity bloc currencies (such as AUD) in the latter half of the week, trampling many of their pairs in the process despite a lack of data.
The AUD/GBP pairing had arguably been experiencing a bounce in the Pound’s favour before the Fed speech was made, but since then the pair rose over 140 pips from a low of 0.5264. The exchange rate continued to rise steadily, climbing over 60 pips in Friday’s European session alone.
While the climb is not as bullish as that experienced in early March, the pair’s slowdown has been expected as it reaches highs not seen in over a year since January 2015.
The price of Australia’s primary export, iron ore, had rallied earlier in March inspiring a very bullish ‘Aussie’. AUD’s climb has slowed due to iron ore prices quickly decreasing to more normal rates, but its continued ability to beat out the Pound is also due to Pound weakness.
Britain’s economy has felt its fair share of structural hits in recent months, and last week after being rocked by ‘Brexit’ debates for most of March other new concerns took centre stage.
In what analysts are calling UK’s ‘steel crisis’, a major steel production company, Tata Steel, has proposed to withdraw UK operations entirely after economic uncertainty and huge losses of £1m a day have left the UK’s steel industry unappealing.
The company, which employs around a whopping 15,000 UK citizens, has cited that it fears the future of the Pound’s strength – likely a ‘Brexit’ fear amid Sterling’s regular ‘Brexit’-related drops.
UK data was also unable to help keep Sterling afloat last week. While Gross Domestic Product (GDP) grew slightly as forecast, it was unable to impress investors who instead eagled in on the nation’s exponential updated account deficit.
Already a hot topic and a big talking point at this year’s UK Budget, the deficit seems unable to meet Chancellor George Osborne’s targets as the previous quarter’s deficit of -£20.1b worsened to a record breaking -£32.7b.
Friday’s European session also saw the release of UK’s Manufacturing PMI, unable to slow the Pound’s fall after a lower-than-forecast result of 51.0.
This week seems set to be a promising period for ‘Aussie’-influenced movement and is likely to see the Australian Dollar pulling a lot of the pair’s weight.
Today’s session sees the release of Australian retail sales, securities inflation and building approvals prints.
It’s likely however that investors will use this time to adjust and settle their positions on the ‘Aussie’ ahead of Tuesday’s session, when the Reserve Bank of Australia (RBA) are due to make their next key interest rate decision.
While the central bank is currently not forecast to make any decisive changes, any inclination of hawkish or dovish sentiment from policymakers is likely to cause largescale movements on AUD.
Some analysts have recently predicted that the RBA could be forced to make surprising interest rate cuts due to a speculated overvaluation of the Australian Dollar. Any hint of this possibility becoming a reality is likely to cause distaste towards the ‘Aussie’, even during a risk-on market environment.
UK data is unlikely to influence the pairing much, though further Pound weakness is possible if the Tata Steel crisis fails to see resolution or, at worst, shuts down altogether and cuts thousands of UK jobs.
However, various UK Markit PMI scores are set for release in the early-week, and a slew of positive results may help Sterling to find a foothold.
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