Sterling Recovers against Australian Dollar on Ray of Brexit Hope

Brexit news to influence GBP/AUD rates

The Pound has made some small gains against the Australian Dollar to end the week after what was been a torrid week for the GBP AUD pair. The Pound had fallen briefly below 1.73 so it is encouraging there has been a bounce higher with 1.75 in its sights. This is more to do with a small win for the Pound after reports suggest there could be a way forward for Brexit using parts of what is knows as the “Jersey model” as a compromise agreement.

The Australian Dollar isn’t in the best spot at the moment for a number of reasons. The ongoing trade war between the US and China is a major concern for Australian Dollar exchange rates as Australian exports do depend on the overall outcome. Australia is a major producer of iron ore which is exported to China for steel production for the manufacturing sector. If Australian trade with China decreases as a result of a global slowdown due to the tariffs which have been imposed, the Aussie Dollar should suffer as a result. Chinese stock markets have been falling of late on concerns there could be a slowdown in the Chinese economy.

The Australian Dollar is also unlikely to make any major gains due to the fact that the Reserve Bank of Australia (RBA) is not looking to raise interest rates any time soon. Although the RBA Governor Philip Lowe has indicated the next move is likely to be upwards there has so far been no offering in terms of timing. This is keeping the pressure on the back foot and with signs of a cooling housing market in Sydney and Melbourne the RBA is unlikely to act in the near future and even cited the housing market as reason to pause.

An important point to note is that the US Federal Reserve is viewed as highly likely to continue its course of interest rate increases and raise interest rates twice more this year. A rise in September and then December would create a bigger divergence in rates between the US and Australia which in my view points to further weakness for the Aussie. A second rate rise in December in the US has not been priced into the market yet though which would suggest further Aussie weakness if the flight to the safety of the US Dollar continues.

Despite a softer outlook on the Aussie the Pound has managed to make sharp losses this week against the Australian Dollar. This is a direct result of recent Brexit uncertainty which follows high profile resignations in Government as well as comments from both Bank of England Governor Mark Carney and Trade Secretary Liam Fox who suggested the chance of a no deal Brexit is sitting at 60%. The prospect of a no deal Brexit is the single biggest driving force in the recent decline in Sterling exchange rates.

Clients looking to buy or sell Australian Dollars who would like more information to help try and time the exchange at the best possible time and to achieve the best rates can contact me, James at jll@currencies.co.uk.