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Australian Dollar to Pound Hits 5-Week High, as RBA Less Likely to Cut

Market CommentaryAustralian Dollar to Pound Hits 5-Week High, as RBA Less Likely to Cut
Australian Dollar to Pound Hits 5-Week High, as RBA Less Likely to Cut

The Australian dollar to pound interbank exchange rate stands at 0.5298 today. This is its highest in five weeks, or since November 13th.

By comparison, back on December 13th, the so-called Aussie dollar was as low as 0.5124 versus the pound. So it’s since risen by around 1.75 cents, or by 3.39%.

This may benefit you, if you’re a Brit selling property abroad Down Under to repatriate the funds to the UK, or if you’re an Australian emigrating to Great Britain.

This is because, when you transfer money to the UK from Australia, you might get a higher pound total, compared to if you’d exchanged currencies in the last five weeks.

To stay up-to-date with the Australian dollar to pound interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘AUD’ (Australian Dollar) to ‘GBP’ (Great British Pound).

Also, to check what’s affecting the value of the Aussie against sterling on the interbank market, go to our AUD to GBP Exchange Rate Updates page. Here, click on the newest article.

One reason why the AUD to GBP interbank exchange rate has hit this five-week high, is because the Reserve Bank of Australia (RBA) looks somewhat less likely to cut interest rates in 2020.

Another factor why the Australian dollar has strengthened versus the pound is because, today, UK Prime Minister Boris Johnson will start the process of limiting the UK’s Brexit transition period.

A third factor why the Aussie dollar has gained in value against sterling is because, yesterday, the Bank of England highlighted that it could cut UK interest rates in 2020, if needed.

AUD to GBP Rate Rises, as RBA Less Likely to Cut in 2020

As I mention, one reason why the Australian dollar to pound interbank exchange rate has hit this five-week high today is because Australia’s central bank, the Reserve Bank of Australia (RBA), now looks less likely to cut interest rates in early 2020.

In part, this is because earlier this week we learnt that Australia’s unemployment rate surprisingly fell in November, as firms created jobs.

To be specific, Australia’s joblessness rate fell by 0.1% last month, to 5.2%, exceeding financial market forecasts for unemployment to remain steady 5.3%.

This is because Australian companies created 39,900 new jobs in November, well above both forecasts for 14,000 new roles, as well as October’s 19,000 fall in positions. So this bodes unexpectedly well for Australia’s job market.

In particular, this week’s upbeat job market statistics take Australia’s unemployment rate closer to the 4.5% level that the RBA considers desirable, to lift Australia’s inflation and wage growth.

After all, when there are more Australians in work, they’ve got more money to spend. This fuels retail spending and economic growth, thereby giving businesses the confidence to increase prices.

As a result, it’s likelier that Australia’s inflation may increase back to the RBA’s 2%-3% target band, in the foreseeable future.

If the Reserve Bank sees that Australia’s price pressures are increasing, this makes it less necessary for the RBA to cut interest rates below their current 0.75%, to a new all-time low in 2020. This is because higher inflation signals a healthy economy.

For example, Lee Hardman at MUFG says that "It is a welcome development and helps to ease concerns over a more material slowdown in the labour market. Market participants have become less confident that the RBA will deliver two further rate cuts.”

So the brighter outlook for Australia’s job market, and the lower odds that the RBA will cut interest rates, have boosted the AUD.

Australian Dollar to Pound Gains, as Boris to Limit Brexit Transition Period

In addition, another reason why the Australian dollar vs pound interbank exchange rate has hit this five-week high is because, today, UK Prime Minister (PM) Boris Johnson will begin to legislate against extending the UK’s Brexit transition period beyond December 31st 2020.

It's thought that this risks creating a new Brexit “cliff edge”, which may slow the UK’s economic growth next year.

To explain, PM Johnson will today introduce in Parliament the Withdrawal Agreement Bill (WAB) that he finalised with former European Commission President Jean-Claude Juncker.

This will include an amendment to limit the UK’s future EU trade talks schedule to the end of 2020. The PM now enjoys an 80-strong majority in the House of Commons, so it’s thought the bill will smoothly pass.

For PM Johnson, the amendment both shows that he’s serious about “getting Brexit done”, and incentivises the EU to negotiate a future trade deal quickly.

However, historically such trade deals take six or seven years to negotiate, so the PM’s decision risks putting the future EU trade deal talks under some pressure. For markets, this risks creating a new Brexit cliff edge at the end of next year.

After all, if the UK doesn’t agree its future EU trade deal in just 12 months, we’ll default to exporting and importing with the Europe on World Trade Organisation (WTO) terms, with higher tariffs and bureaucracy.

This might slow the UK’s GDP (Gross Domestic Product) growth, compared to if the UK ultimately reaches a trade agreement with the EU. So this possibility has hurt sterling.

After all, for the world’s financial markets, the advantage of PM Johnson’s electoral victory last week was that it provided the possibility of UK economic and political stability next year.

Money managers had hoped that the PM might use his new majority of MPs to soften his Brexit approach, or even concede in some areas. However, instead PM Johnson has set this tight new deadline.

For British businesses, this risks extending the UK’s Brexit uncertainty over next year. This is because we don’t know if we’ll reach a trade deal with Europe in 2020, or default to WTO terms.

In spite of the Conservative Party’s electoral victory last week, this could discourage firms from hiring new staff or buying new equipment. We’ll see the effect of PM Johnson’s decision in 2020, and sterling’s reaction.

Australian Dollar Vs Sterling Strengthens, as BoE Maintains Possibility of Rate Cut

Furthermore, a third partial explanation why the Australian dollar to pound interbank exchange rate has hit this five-week high today is because, yesterday, the Bank of England (BoE) left open the possibility of cutting UK interest rates early next year.

When a central bank cuts a country’s borrowing costs, this tends to weaken the currency involved, because it’s less profitable to invest in.

On Thursday 19th, the BoE held UK interest rates steady at 0.75%, as widely forecast. Two members of the central bank’s nine-person Monetary Policy Committee (MPC) voted to ease UK borrowing costs, like in November.

However, in the Old Lady of Threadneedle Street’s, as the BoE is also affectionately known, accompanying statement, the central bank hinted that it may cut rates in 2020.

In particular, the BoE stated that the UK’s economic growth has been weakened, both by "Brexit uncertainty" and "weaker global growth driven by trade protectionism.”

As a result, the UK’s central bank now forecasts that Britain’s economy will expand by just 0.1% in Q4, from October to December. This is below the BoE’s previous forecast for 0.2%, so points to slowing momentum.

Moreover, the BoE added that "If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.”

This tells us that, if the UK economy and inflation don’t accelerate, the central bank may cut interest rates to 0.5%, or perhaps even to 0.25%, to support the UK’s GDP growth outlook.

In response to this statement, Robert Wood, an economist at BofA Global Research, says that "The BoE needs a large rebound in PMIs to keep its forecasts on track and appears to be assuming a 'deeper' future UK-EU trading relationship than PM Johnson plans.”

“We think the risks lie towards cuts to BoE growth forecasts in January. We expect two BoE rate cuts next year, the first one in May,” adds Mr. Wood.

So this possibility that the BoE might cut UK interest rates next year has weakened the pound.

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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 Contact Us.

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