GBP/AUD rises above $1.86

GBP/AUD hits one month high

The sterling/aussie cross rose into the AUD$1.86s on Wednesday, after better-than-expected data from the UK gave the pound a welcome boost. Poor data from Australia also left the aussie on the back foot, pushing it to fresh four and a half year lows against the US dollar. The graph below shows GBP/AUD movement over the previous 24 hours.


GBP/AUD 24 Hours


Services PMI data from the UK on Wednesday morning surprised the markets, rising to 58.6 in November up from 56.2 in October. Anything above 50.0 indicates expansion in the sector. The figures eased fears over a slowing economic recovery in the UK with the pound strengthening as a result.

“The pick-up in the UK Markit/CIPS services PMI in November provides reassurance that the UK’s economic recovery has remained strong despite a weaker global environment,” said Samuel Tombs, senior UK economist at Capital Economics.c“Looking ahead, with households’ and firms’ balance sheets in improved health, confidence high and real incomes set to record their strongest growth in more than a decade in 2015, we doubt that the recovery is about to run out of momentum. Our forecast remains for GDP to grow by 3% in both 2015 and 2016.”

The UK also saw the release of the Autumn Statement from Chancellor George Osborne, in which he announced a shake up of the way stamp duty is calculated, as well as further cuts in government spending which should see the UK move from a deficit to a surplus by 2019. The pound responded favourably, moving back into the mid €1.27s against the euro and the $1.86s against the Australian dollar.

Australian weakness

On the Australian side of the cross, surprise weakness in the national accounts has led analysts to predict a cut in interest rates in spring 2015. If the Royal Bank of Australia (RBA) to decide to cut rates we can expect to see a significant weakening of the Australian currency. The aussie has historically benefitted from higher interest rates in Australia, as investors seek higher yielding assets after borrowing using a lower yielding currency – a process known as a currency carry trade. Figures released on Wednesday showed GDP growth for the September quarter came in lower than forecast, down to 0.3% from 0.5% in the June quarter. As a result, most of the large investment banks, including Goldman Sachs and Deutsche Bank, are now forecasting a 25 basis points cut in March 2015 with another to follow in August.

“Although third-quarter GDP growth was consistent with our forecast . . . we are shifting our view on interest rates back to interest rate reduction in 2015” Goldman Sachs said. “Nevertheless, revisions to the back data and the composition of the GDP data were sufficiently poor to tilt the balance of probabilities towards a rate cut in the first half of 2015 as our base case,” it said.

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