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Brexit Speculation and Falling RBA Interest Rate Hike Bets Lead to GBP/AUD Surge

Last week’s high: AU$1.7988

Last week’s low: AU$1.7511

Australian Dollar Plummets on Bearish RBA Bets and Risk-Aversion

A week of bullishness for the Pound to Australian Dollar (GBP/AUD) exchange rate continued right through Friday, as a more appealing Pound easily capitalised against a slumping Australian Dollar.

In the middle of the week, EU Chief Negotiator Michel Barnier surprised markets by saying the EU was prepared to offer the UK a post-Brexit partnership the likes of which had not been had with any other non-EU country. His remarks were perceived as optimistic and briefly catapulted the Pound higher.

But both Barnier himself and various analysts reminded markets on Thursday that the EU was still preparing for a possible ‘no-deal’ Brexit, and that this was just a possible outcome if the UK cooperates. Despite this the Pound remained bullish versus an unappealing Australian Dollar.

Reserve Bank of Australia (RBA) interest rate hike bets plunged last week, as Australia’s second-biggest lender, Westpac, suddenly announced that it would be hiking its rates on variable home loans. The news caused concern that other banks would follow suit and pressure the RBA to leave key monetary policy frozen for longer to accommodate this.

On top of this, political uncertainties persisted in Australia following the change in leadership in the nation’s coalition government. Lastly, US-China trade jitters worsened again at the end of the week, further dampening market demand for risky trade-correlated currencies like the Australian Dollar.

AUD Outlook: Investors Anticipate Reserve Bank of Australia (RBA) Decision

Following last week’s Westpac bank mortgage rate hike, investors are even more hotly anticipating September’s Reserve Bank of Australia (RBA) policy decision – which will take place on Tuesday.

The RBA is not expected to make any changes to monetary policy. However, amid the Westpac mortgage rate hike and signs that US-China trade tensions will continue to worsen, investors are concerned the bank’s tone could become more dovish.

If the bank expresses more concern than expected on Australia’s economic outlook due to recent developments, the Australian Dollar could remain weak. Should the bank hint that its next move on interest rates is more likely to be a cut than a hike, the ‘Aussie’ could fall even lower.

On the other hand, if the bank is more hawkish than expected or plays up the resilience of Australia’s economy, GBP/AUD could be in for some losses next week.

The Pound is likely to remain vulnerable to Brexit developments. Fissures within the UK government or signs that a ‘no-deal’ Brexit is becoming more likely could cause Sterling to lose much of its recent strength.

Of course, upcoming data could also prove influential. August PMI stats will be published throughout the week, which will give GBP/AUD investors a better idea of how the UK and Australian economies performed last month.

 

Key Events

3rd September

02:30 Australian Business Inventories

02:30 Australian Retail Sales

09:30 UK Manufacturing PMI

4th September

05:30 RBA Policy Decision

09:30 UK Construction PMI

5th September

Australian Services PMI

02:30 Australian Growth Rate

09:30 UK Services and Composite PMI

6th September

02:30 Australian Trade Balance

7th September

Australian Construction PMI

02:30 Australian Home Loans

09:30 UK Consumer Inflation Expectations

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To keep up to date with the Australian Dollar, visit the AUD blog in our Currency News section.

 

Alastair Archbold

Currency Trader

aja@fcgworld.co.uk

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