Australian Dollar Pound (AUD/GBP) Exchange Rate Boosted by Brexit News
Comments from chief EU negotiator Michel Barnier prompted the Australian Dollar to Pound (AUD/GBP) exchange rate to surge higher heading into the weekend.
As Barnier noted that a Brexit transition deal is ‘not a given’ this encouraged investors to pile out of the Pound (GBP) during Friday’s European session.
Markets were naturally spooked by the suggestion that the UK could still potentially face an exit via the cliff-edge, discouraged by the slightly less optimistic slant of Barnier’s words.
This reversed all of the bullishness seen on the back of the Bank of England’s (BoE) more hawkish message, given that Governor Mark Carney had stressed the impact of Brexit developments on monetary policy considerations.
With any breakdown in Brexit negotiations likely to give the BoE incentive to leave interest rates on hold for longer the appeal of the Pound declined sharply.
Falling Australian Borrowing Figures Support Australian Dollar (AUD)
Although confidence in the Australian Dollar (AUD) remained somewhat muted this failed to hamper the strength of the AUD/GBP exchange rate.
December’s home loans and investment lending figures both showed a sharp decline on the month, suggesting that borrowing fell at the end of 2017.
These weaker figures may go some way towards easing the worries of the Reserve Bank of Australia (RBA), given its recent note of caution on the subject of high household debt and weak wage growth.
Even so, interest rates look set to remain on hold until there is a more marked improvement in domestic data, specifically wages, limiting the upside potential of AUD exchange rates in general.
With the latest US government shutdown proving fairly short-lived, though, the Australian Dollar was unable to benefit from any particular resurgence in market risk appetite.
Weaker UK Inflation Forecast to Benefit AUD/GBP Exchange Rate
The AUD/GBP exchange rate could come under renewed pressure next week, with December’s Australian credit card purchases figure released on Monday.
Any increase in borrowing is unlikely to be well-received by the RBA, encouraging policymakers to maintain a more neutral outlook for longer.
However, the appeal of the Pound could weaken further in response to Tuesday’s UK consumer price index data.
If inflationary pressure is found to have eased once again in January this may well undermine market confidence in the prospect of an imminent BoE interest rate hike.
Should inflation continue to fall back towards the BoE’s target rate of 2% the incentive to raise rates will naturally diminish, potentially encouraging some policymakers to sit tight.
Even so, the key focus for Sterling in the days ahead will remain developments in the Brexit process.
Unless markets are offered greater clarity over the likely shape of the UK’s future trading relationship with the EU the downside bias of the AUD/GBP exchange rate is likely to be somewhat limited.