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AUD to GBP Rate Hits 15-Week High, on 'No Deal' Brexit Risk

Market CommentaryAUD to GBP Rate Hits 15-Week High, on 'No Deal' Brexit Risk
AUD to GBP Rate Hits 15-Week High, on 'No Deal' Brexit Risk
Australian Dollar to Pound Rate.

The Australian dollar to pound interbank exchange rate has reached its highest in 15 weeks today, or since February 19th, at 0.5516.

By comparison, back on May 6th, the AUD was as weak as 0.5315 versus the GBP. So it's since strengthened by over two cents, or by +3.78%.

To put this into context, at today's interbank exchange rate of 0.5516, AU$250,000 would be worth £137,900.

By contrast, at the interbank exchange rate on May 6th of 0.5315, AU$250,000 would have been worth £132,875.

So in the last month, for the same Australian dollar amount, that's an increase in the pound total of +£5,025.

You might find this of interest, if you're an Australian planning to emigrate to the UK, or a Brit thinking of selling your property in Australia to repatriate the funds to the UK.

This is because, when you transfer money to the UK, you could now get a higher pound sterling total in your UK bank account, compared to if you'd transferred money in the recent past.

A first factor why the Australian dollar to pound interbank exchange rate has hit this 15-week high is because financial markets are worried that the UK is heading for a 'No Deal' Brexit.

However, looking forward, the AUD to GBP rate may be influenced by the fact that Australia's economy slowed in early 2019, while the Reserve Bank of Australia has cut interest rates.

Let's take a closer look at these factors that have lifted the Australian dollar exchange rate to this 15-week high. This may help you to decide when to exchange Australian dollars for pounds.

AUD to GBP Rate Rises, as Possibility of 'No Deal' Brexit Increases

A first factor why the Australian dollar to pound interbank exchange rate has hit this 15-week high is because the financial markets are concerned that the UK might exit the EU without a deal.

In particular, investors are worried that ex-Foreign Secretary Boris Johnson will win the Conservative Party's upcoming leadership contest, and become the next Prime Minister.

Mr. Johnson has pledged to finish Brexit "with or without a deal" by the end of the extended deadline of October 31st, according to PoliticsHomes.com.

Since the start of this week, the odds of Mr. Johnson becoming the next Prime Minister have fallen. According to Oddschecker, on Monday the odds of the former Mayor of London replacing Theresa May were 7/4. By comparison, today they're 10/11.

A big reason why there's a rising probability that Mr. Johnson will become the UK's next Prime Minister is because he's winning the support of growing numbers of Conservative MPs.

For example, yesterday in The Times newspaper, the moderate Tory MPs Rishi Sunak, Robert Jenrick and Oliver Dowden wrote an article, giving their support to Mr. Johnson.

More Tory MPs are supporting Mr. Johnson, because they favour his stance of taking the UK out of the EU without a deal, if the EU doesn't arrange a better settlement with the UK.

Also, this is the preferred stance among the majority of Conservative Party members. It's these members who will ultimately decide whether to elect Mr. Johnson the leader of the Conservatives, in July.

However, both the financial markets and British businesses are worried about the prospect of a 'No Deal' Brexit.

This is because we currently do around half our international trade with the EU. If we exit the EU without a deal, we'll be subject to lots of new tariffs and bureaucracy to send our exports to Europe. In turn, this might slow the UK's economic growth.

With this in mind, the value of the pound has fallen, as the odds increase that Boris Johnson might become the next UK Prime Minister, and pursue a 'No Deal' Brexit.

Australia's Slowing Economy Might Affect Value of Australian Dollar

However, looking forward, the value of the Australian dollar might be affected by the fact that Australia's economy slowed in early 2019.

To be specific, according to the Australian Bureau of Statistics (ABS) on Wednesday, Australia's economy grew by just 1.8% in Q1, between January and March.

This is well below Q4 2018's figure of 2.3%. It's also Australia's slowest GDP (Gross Domestic Product) expansion in 5 years, since 2014.

Of particular note is the fact that Australia's GDP per capita fell for the third quarter in a row at the start of this year. GDP per capita measures Australia's wealth per citizen.

So this tells us that Australians have been getting poorer for nine months. This is the first time this has happened since Australia's last recession, in 1982.

According to the ABS, Australia's economy slowed in Q1 2019, because Australia's house prices are falling, and there's low wage growth. In particular, dwelling investment has fallen by -3.1% in March compared to a year ago.

It's now forecast that Australia's economy will grow less than the 2.25% predicted by Treasurer Josh Frydenberg in his April budget. So this might influence the value of the Australian dollar, looking ahead.

AUD Might Be Influenced as Reserve Bank of Australia Cuts Interest Rates

In addition, another factor that might influence the value of the Australian dollar, looking forward, is the fact that this week the Reserve Bank of Australia (RBA) cut interest rates.

On Tuesday, the RBA slashed interest rates by -0.25%, to 1.25%. This is the RBA's first rate cut in three years, since August 2016. Also, it's a new all-time low in Australia's interest rates.

The RBA Governor Philip Lowe explained the bank's decision by saying: "There has been little further inroads into the spare capacity in the labour market of late" and "overall wages growth remains low.

“Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment,” added Mr. Lowe in his statement.

This is to say, Australia's central bank cut interest rates, to encourage unemployment to fall further, and to stimulate higher wage growth Down Under.

What's more, it looks likely that the RBA will cut interest rates further, later this year. Mr. Lowe added in his statement that: "The board has not yet made a decision but it is not unreasonable to expect a lower cash rate."

In addition, according to a Bloomberg poll of economists, 80% expect the RBA to cut interest rates again, by August or September.

When the Reserve Bank cuts interest rates, this lowers mortgage repayments for house-owning Australians. In turn, Australian households have more cash to spend elsewhere. This stimulates the economy.

However, at the same time, lower interest rates cut the rate of return for investing in Australian assets. This discourages international money managers from placing their funds in Australia. This might affect the value of the Australian dollar in future.

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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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