GBP/AUD rises to $1.90

Pound rises after volatile week

The sterling/aussie cross broke through the $1.90 mark on Monday, as speculation mounts over an interest rate cut from the RBA as early as March this year – potentially followed by another in August. A surprise rate cut by the Bank of Canada last week, coupled with the ECB’s aggressive quantitative easing programme, has left the door open for the Reserve Bank of Australia to loosen monetary policy.

As a result, the Australian currency has lost 3% against sterling over the last week and has dropped to a fresh five and a half year low against the US dollar. The graph below shows GBP/AUD movement over the last 7 days.

GBP/AUD

GBP/AUD 7 Days

 

The Aussie’s demise is almost on a par with the struggling euro, having now fallen 17% against the US dollar in the last 8 months. Analysts are forecasting a 47% chance that the RBA will lower rates when the board return from their summer break next Tuesday. The RBA’s base rate is significantly higher than any other developed Western economy, so there is certainly scope to loosen policy. The slowdown in China has weighed heavily on the Australian currency and, with 35% of Australia’s exports heading to Chinese ports, caused concern amongst analysts who feel that a cut in the base rate is needed to stimulate economic growth in Australia.

“The RBA is probably going to stay on hold next month, but there’s a not-insignificant chance that they do cut….they’ll have a more dovish tone in their language at least,” said Greg Gibbs, Royal Bank of Scotland’s head of Asia-Pacific markets strategy.

The potential interest rate cut could weaken the Australian currency further, perhaps pushing it up towards $2 to the pound. On the sterling side of the cross, we may see some weakness as expectations of an interest rate rise by the Bank of England are pushed back further. With inflation slowing, most analysts are now expecting a rise in the base rate in the first half of 2016 at the earliest. This could keep sterling’s gains against the Aussie in check, while potentially lowering the rate for other GBP currency crosses.

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