The pound to Australian dollar interbank exchange rate is at 1.9188 today. This is close to two cents, or 0.98%, below sterling’s recent 41-month high versus the so-called Aussie dollar, its highest since June 24th 2016, reached this Tuesday, at 1.9377.
Sterling has weakened against the Australian dollar, because yesterday, the US Federal Reserve ruled out the possibility of lifting America’s interest rates for now.
Fed Chairman Jerome Powell said that a “significant, persistent” increase in US inflation would be needed to convince the United States’ central bank to lift borrowing costs, above 1.5%-1.75%.
This has lifted the Australian dollar, because when the Fed keeps interest rates steady, this makes investing in USD-denominated assets less profitable, than if US monetary policy were higher.
In turn, this encourages markets to buy non-USD denominated assets to seek returns on investment, like the Australian dollar, thus lifting its value.
How Can Sterling Be Influenced by Today’s UK Election?
Turning to the rest of this week, the pound to Australian dollar interbank exchange rate could be influenced, by the UK’s election today.
Markets factor in a 73% probability that Prime Minister (PM) Boris Johnson’s Conservatives will win a majority of seats, based on the latest opinion polls. This has supported sterling, because in general, money managers want the UK’s election result to be clear.
This way, the UK might finalise Brexit faster, which may give confidence to British businesses, and support the UK’s economic growth in 2020. This explains why, although sterling has weakened versus the Aussie, it still stands near its 41-month high.
Brexit Resolution Hangs in the Balance
That said, although markets seem confident of a Tory victory, the opinion polls have often been inaccurate in the past. Until we learn the UK election results early on Friday morning, there remains the risk of alternative scenarios, such as a ‘hung’ Parliament.
A ‘hung’ Parliament is when a government can form, yet without enough MPs to pass laws by itself. It’s been the UK’s situation since the 2017 election, when former PM Theresa May lost the Tories’ majority.
Since then, small numbers of MPs have been able to veto the Brexit negotiations, causing deadlock. So this risk could influence the value of sterling, before tomorrow’s election results.
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