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Australian Dollar to Pound Hits 7-Month High, as China Grows

Market CommentaryAustralian Dollar to Pound Hits 7-Month High, as China Grows
Australian Dollar to Pound Hits 7-Month High, as China Grows
Australian Dollar to Pound Rate.

The Australian dollar to pound interbank exchange rate has hit 0.5597 today at the time of writing. This is its strongest since January 16th, or seven months.

By contrast, back on May 6th, the Australian dollar was as weak as 0.5303 versus British sterling. So it's since risen by over +2.75 cents, or by +5.54%.

This may benefit you, if you're a Brit selling property abroad in Australia, or an Australian business owner making international payments to import UK products.

This is because you might now get a higher pound sterling total in your UK bank account, compared to if you'd transferred money earlier in 2019.

In turn, this might make it more profitable to repatriate the funds from your Australian home sale, or cut your business costs to import British goods to Australia.

To stay up-to-date with the Australian dollar to pound interbank exchange rate, visit Pure FX's Rates & Tools page. Here, select 'AUD' to 'GBP' to see today's rates and for the last week.

Also, to check what's affecting the value of the Australian dollar against the pound, visit our AUD to GBP Exchange Rate Updates page. Click on the latest article for the most recent news.

A first factor why the Australian dollar to pound interbank exchange rate has hit this seven-month high is because China, Australia's closest trade partner, outperformed forecasts in June.

A second reason why the AUD to GBP interbank exchange rate has risen is because, last week, the US Federal Reserve signalled that it will soon cut interest rates. This favours Australia.

A third explanation why the Australian dollar has gained in value against British sterling is because the financial markets remain uncertain about the UK's outlook for Brexit.

Let's take a closer look at why the Australian dollar has reached this seven-month high versus the pound. This may benefit you, for when you transfer money to the UK later this year.

Australian Dollar to Pound Hits 7-Month High, as China Grows

As I mention, a first factor why the Australian dollar to pound interbank exchange rate has reached this seven-month high is because China's economy has exceeded expectations in June.

This has benefited the Australian dollar, because China is Australia's closest trade partner. So when China's economy grows quickly, this tends to accelerate Australia's economic growth too.

According to the National Bureau of Statistics of China (NBSC) this morning, China's industrial production increased by +6.3% in June compared to a year ago.

This is above May's figure of +5.0%, which was a 17-year low. This is also beyond economists' forecasts for +5.2%, so this tells us that China's factories increased their output considerably more than hoped for last month.

In addition, China's retail sales grew by +9.8% in June compared to 12 months earlier, said the NBSC today. This is above financial markets' predictions for +8.3%, as well as May's figure of +8.6%.

This tells us that Chinese consumers splashed out at the shops more than forecast last month. This could further help to accelerate China's economy, looking forward.

Also, China's GDP (Gross Domestic Product) expanded by +6.2% in Q2 2019, between April and June this year, according to the NBSC today.

This is below Q1's figure of +6.4%, and is the slowest rate in 27 years, since 1992. However, these economic growth figures are in line with economists' forecasts, so have allayed fears of a sharper downturn in China's economy.

Moreover, it's worth noting that China's government has injected significant stimulus into the economy recently, to boost economic activity.

China's upbeat industrial production and retail sales figures for June 2019, at the end of Q2, suggest that this stimulus is having a positive effect. So if this continues, China's economic growth could rebound in Q3, between July and September.

These encouraging Chinese statistics have strengthened the Australian dollar, because Australia sends more exports to China than any other country. So when China's economy does well, Chinese demand for Australia's products will rise.

This might include Australian iron ore, for China's construction industry, or luxury Australian goods, like Ugg boots, for Chinese consumers.

AUD to GBP Rate Rises, as Fed's Powell Signals Interest Rate Cuts

In addition, a further explanation why the Australian dollar has gained in value versus the pound sterling is because, last week, the US Federal Reserve's Chairman Jerome Powell signalled that the Fed may cut interest rates as soon as this month.

This encourages investors to take money out of the USA and invest it in other countries with relatively high interest rates, such as Australia.

Speaking to America's Congress last Wednesday July 10th, Mr. Powell suggested that the US central bank could reduce borrowing costs below their current 2.25-2.5%, later in July.

Mr. Powell cited several reasons for this, firstly a desire to sustain America's economic expansion. America's GDP has now been growing steadily for longer than any time in history, yet has slowed down recently.

Furthermore, the Fed's Chairman said that he wanted to protect America's economy from several risks. This include US President Donald Trump's trade tariffs with China, which have increased prices for American shoppers.

These risks also include Brexit, plus the possibility that Congress won't increase America's debt ceiling. This will oblige the Federal Government to close.

Also, the Fed's Chairman added that US inflation remains "muted", and there's a risk of "persistent" weakness, below the Fed's target of 2.0%.

As a result, America's central bank could cut interest rates, to make taking out loans for households and businesses cheaper. This would help stimulate economic activity, in turn lifting price pressures, otherwise known as inflation.

However, while cutting US interest rates might protect America's economy and lift muted inflation, this also discourages the world's money managers from buying United States assets.

This is because, when the Fed cuts interest rates, it's less profitable to invest in America. After all, you'll get lower returns on investment compared to if interest rates were higher.

Given this, Mr. Powell's hints that the Fed will soon cut interest rates have favoured the Australian dollar.

This is because, while interest rates in the USA remain higher than in Australia, at 2.25-2.5% compared to 1.0%, a Fed interest rate cut would narrow this gap. In turn, this might encourage the world's investors to buy Australian assets, to diversify away from the USA.

Australian Dollar Gains Versus Pound, as Brexit Uncertainty Continues

Also, another reason why the Australian dollar to pound interbank exchange rate has reached this seven-month high is because the financial markets and businesses remain uncertain about the UK's outlook for Brexit.

In particular, it's unclear if likely next Prime Minister (PM) Boris Johnson will carry out his pledge to exit the UK with or without a deal, by the deadline of Halloween.

Mr. Johnson looks set to become the UK's next Prime Minister, when the Conservative Party's leadership contest closes next Monday July 22nd.

The financial markets are placing a close-to 100% probability that Mr. Johnson will beat his rival, Foreign Secretary Jeremy Hunt, to replace the outgoing Theresa May. In part, this is because of Mr. Johnson's larger media presence, reports The Telegraph newspaper.

However, while investors feel confident that Mr. Johnson, an ex-Mayor of London and former Foreign Secretary, will become PM, they're less clear about what he'll do once in power.

Since the start of the Tories' leadership contest, Mr. Johnson has promised to take the UK out of the EU by the ended of the extended deadline of October 31st, "come what may, do or die."

The thing is though, countless economists and UK businesses have warned that, if the UK exits the EU without a deal, our economy will slow.

For instance, it's possible that, following the UK's original deadline of March 31st, the UK economy contracted in Q2, between April and June. In particular, Britain's manufacturing and construction sectors are shrinking at the fastest pace in several years.

With this in mind, the financial markets are waiting to see if, once Mr. Johnson enters No. 10 Downing Street, he'll take a more moderate route.

If the next Prime Minister changes course, and extends the UK's Brexit deadline beyond October 31st, this might disappoint members of the Conservative Party, yet bring relief to investors and business. This might affect the pound too.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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