Split on Reserve Bank of Australia Outlook Leaves Pound to Australian Dollar Narrow
The Australian Dollar to Pound (AUD/GBP) exchange rate was unable to sustain gains last week, falling from a two-month-high of 0.5846 down to 0.5772 due to a rise in ‘soft Brexit’ hopes.
Amid a lack of market reasons to buy the Australian Dollar (AUD), the currency was unable to hold its ground against a recovering Pound (GBP).
Strong US inflation stats towards the end of last week left markets more confident that the Federal Reserve could pick up the pace of its US interest rate hikes. This weighed on appetite for the risky ‘Aussie’.
On top of this, there appears to be a split in opinion on whether or not the Reserve Bank of Australia (RBA) is likely to take a hawkish tone or a more dovish one in 2018.
According to analysts from Credit Suisse;
‘Supposing that residential investment flattens out at a high level, and that infrastructure investment growth slows, it is very hard for us to see where above potential growth will come from
It is even harder to see inflation returning back to the RBA’s target band over the next few years. Therefore, we still see room for rate cuts.’
However, markets still appear optimistic that the RBA will instead become more hawkish, with a 25 basis point rate hike from the bank priced in for some time this year.
Pound (GBP) Exchange Rates Benefit from ‘Soft Brexit’ Speculation
Could some EU officials help the UK government to secure a ‘soft Brexit’ in UK-EU negotiations? That’s what many Pound investors are hoping following reports that emerged on Friday.
According to an anonymous source familiar with the situation, Spain and The Netherlands’ finance ministers are both hoping for Britain to maintain close ties to the EU even after the Brexit process ends.
The source claimed that the ministers were concerned about Britain losing its close trade and investment ties with the nations, as well as how higher trade tariffs may impact economies.
While officials denied the validity of the reports, Pound investors appeared to find them convincing. The Pound surged following the reports and this caused AUD/GBP to end last week lower.
Australian Dollar to Pound (AUD/GBP) Forecast: Key UK and Australian Data in Focus
In the coming sessions, the Australian Dollar to Pound (AUD/GBP) exchange rate could see a shift in direction depending on how impressive upcoming ecostats are.
Tuesday will see the publication of Britain’s December Consumer Price Index (CPI) report, which is forecast to have slipped from 3.1% to 3% year-on-year and to have risen from 0.3% to 0.4% month-on-month.
If UK inflation comes in higher than forecast, it will boost speculation that the Bank of England (BoE) could be pressured into tightening UK monetary policy again over the next year.
On the other hand though, lower-than-expected inflation would indicate that domestic inflation has more to do with the Pound’s weakness than price pressures. This would leave Sterling weak.
As for the Australian Dollar, Thursday is likely to be a highly influential session for ‘Aussie’ trade.
Not only will Westpac publish its January consumer confidence surveys, but December’s Australian job market report will be published.
If Australia’s job market continues its trend of impressing investors, the Australian Dollar to Pound (AUD/GBP) exchange rate could see some gains towards the end of the week.