A weaker-than-expected UK inflation report allowed the Australian Dollar to Pound Sterling (AUD/GBP) exchange rate to remain on an uptrend on Tuesday, with referendum uncertainty continuing to drag on the Pound.
The Australian Dollar (AUD) got off to a strong start to the week in spite of the latest raft of Chinese data proving somewhat discouraging. Chinese Retail Sales and Foreign Direct Investment figures both fell short of forecast, with investment showing an unexpected contraction of -1.0% in May. While this boosted safe-haven demand and particularly weakened the appeal of the commodity-correlated ‘Aussie’ it failed to keep the antipodean currency on a downtrend for long.
Demand for the Pound (GBP) was substantially weakened by a number of opinion polls which pointed towards an increasing ‘Leave’ campaign lead, with one survey in particular putting the ‘Brexit’ supporters ten points ahead of ‘Remain’. This naturally prompted the odds of the UK voting to leave the EU to be revised higher, reducing the appeal of Sterling. With less than a fortnight to go until the crucial vote markets are becoming increasingly cautious of the result, leaving the Pound vulnerable to further losses.
Investors were not especially encouraged to find that the Australian NAB Business Confidence Index weakened from 5 to 3 in May. This would not seem to suggest particularly strong optimism within the domestic economy, furthering the impression that economic conditions are less than robust. However, the mood towards the Australian Dollar improved later in the day as markets began to brace for the latest Federal Open Market Committee (FOMC) policy meeting, allowing further gains against some of its rivals.
The May UK Consumer Price Index did not offer a rallying point for the Pound on Tuesday, with inflation failing to strengthen as anticipated. With inflationary pressure holding steady at 0.3% on the year the chances of the Bank of England (BoE) meeting its 2% inflation target in the near future appeared to retreat further. This somewhat undermined the impression that referendum uncertainty has not had a particularly tangible impact on the domestic economy, giving investors little reason to buy back into the weakening Pound.
A reassuring Westpac Consumer Confidence result could see the Australian Dollar to Pound Sterling (AUD/GBP) exchange rate extending its gains further today. However, if domestic sentiment continues to demonstrate softness then the ‘Aussie’ is likely to cede some ground to its rival. Risk appetite could increase ahead of the latest Fed meeting, meanwhile, to the benefit of the antipodean currency.
Later in the week further Australian Dollar volatility should be expected with the release of the May employment data, although the Unemployment Rate is not forecast to see any change. Confidence in the outlook of the Australian economy could still be undermined by a weaker report, as researchers at BNZ noted:
‘One puzzle emerging from the employment report is coming from a fall in hours worked, which is occurring despite continued employment growth. It is not clear whether the falls in hours worked reflect inherent volatility in the series and hence is likely to bounce back, is a step down unrelated to employment growth as had occurred in 2012, or is reflective of greater spare capacity in the labour market than previously suggested by the headline unemployment rate.’
Even so, if ‘Brexit’ worries continue to mount ahead of the UK’s referendum date the AUD/GBP exchange rate is likely to remain on a stronger footing.
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