RBA Moves Cautiously in First Rate Decision of 2018, AUD Exchange Rates Initially Suffer
The Australian Dollar Pound Sterling (AUD/GPB) exchange rate fluctuated on Tuesday as markets reacted to the first Reserve Bank of Australia (RBA) monetary policy decision of 2018.
In a cautious (but widely expected) move the RBA decided to maintain interest rates at the record low of 1.5%, citing concerns over the recent downward shift in Australian consumer prices and ongoing issues of weak consumer spending.
Philip Lowe, Governor of the RBA stated:
‘The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this process is likely to be gradual’.
This is no surprise after the dip to 1.9% in Australian consumer price growth –notably below the central bank’s 2% target, though this is expected to build in the medium-term.
The primary ongoing source of uncertainty is the outlook for household consumption, with Lowe pointing out that ‘Household incomes are growing slowly and debt levels are high’.
In other news Australia’s trade balance missed its mark in December, falling to –A$1358m from the previous A$36m and coming up well below the forecast surplus of A$200m.
Combined, this news initially sent AUG/GBP tumbling, as the day progressed, however, the Pound soon succumbed to recent disappointing data and ongoing difficulties in the Brexit negotiation process.
Pound (GBP) Exchange Rates Limited by Soft UK Data and ongoing Brexit Uncertainty
Pound (GBP) exchange rates fluctuated on Tuesday, rising in the early hours only to fall later in the day as markets reacted to a sudden pickup in demand for the US Dollar, ongoing Brexit uncertainty and recent soft UK ecostats.
Phase 2 of the Brexit negotiation process is ongoing, but impasses still remain.
UK Prime Minister Theresa May has insisted that the UK will not be part of ‘a’ or ‘the’ customs union, instead continuing to push for a bespoke Brexit trade deal with the EU that would ensure the UK’s freedom to pursue trade opportunities with other nations during the transitionary period.
UK Brexit Secretary David Davis reiterated this, stating:
‘We want a comprehensive free trade agreement and we want a customs agreement and to make that as frictionless as possible… whilst still giving ourselves the opportunity to make free trade deals with the rest of the world’.
Despite these statements Brussels continues to assert that the UK has not given ‘clarification’ on what it wants out of Brexit, with Manfred Weber, leader of the largest group of MEP’s in the European Parliament asserting that the UK needs to ‘come out with concrete proposals very soon’.
Ultimately, key factors like the rights of EU/UK citizens, the form a trade deal and whether the UK will remain subject to new EU laws during the transition period continue to remain impasses.
Markets will be keen to see if any progress is made by Friday, however, when a statement is expected from the UK regarding its future relationship with the EU.
AUD/GBP Exchange Rate Forecast: Markets Prepare for BoE Rate Decision
The Bank of England’s (BoE) first rate decision of 2018 is due on Thursday – an event that could cause serious volatility for the AUD/GBP exchange rate.
The central bank is currently expected to hold interest rates at 0.5% at this meeting, though rate hikes as early as May are now being forecast by various parties.
This optimism is largely driven by recent better-than-expected UK growth readings, though markets still predict that a hawkish move will be highly dependent on the outcome/progress of the Brexit negotiation process.
Whilst a rate hike is not expected, markets will be keen to assess differences in the bank’s accompanying statement for any possible indication that the BoE could be preparing for a hawkish move in May.
Indeed, if the bank proves optimistic then the AUD/GBP exchange rate could come under increased pressure.
If, however, the statement proves dovish (or remarks at the press event) then the AUD/GBP exchange rate could extend its lead.