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Australian Dollar to Pound Near 3-Week High, as BoE May Be Downbeat

Market CommentaryAustralian Dollar to Pound Near 3-Week High, as BoE May Be Downbeat
Australian Dollar to Pound Near 3-Week High, as BoE May Be Downbeat
Australian Dollar to Pound.

The Australian dollar to pound interbank exchange rate stands at 0.5364 today. This is just 0.2% below the so-called Aussie’s recent three-week high versus British sterling, its strongest since October 15th, reached this Monday 5th, at 0.5375.

By comparison, back on October 16th, the Australian dollar was as weak as 0.5244 versus the pound. So Australia’s currency has since strengthened by over one cent, or by 2.28%.

This could benefit you, 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 three weeks.

In turn, this may make it more affordable for you, if you’re selling property abroad Down Under to repatriate the funds to the UK, or if you’re making regular payments to Great Britain.

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 find out what’s affecting the value of the Aussie versus sterling recently, go to our AUD to GBP Exchange Rate Updates page. Here, simply click on the latest article for the recent news.

One reason why the Australian dollar has neared this three-week high versus the pound is because it’s thought that the Bank of England (BoE) could cut its UK economic growth outlook today.

Another factor why the Aussie has gained in value versus sterling is because the Reserve Bank of Australia (RBA) was surprisingly optimistic at its monetary policy meeting, earlier this week.

However, looking to the next few months, the Australian dollar to pound interbank exchange rate could be affected, because it’s still thought that the RBA will cut interest rates further next year.

Australian Dollar to Pound Nears 3-Week High, as BoE May Cut UK Growth Outlook

As I mention, one reason why the Australian dollar to pound interbank exchange rate has neared this three-week high today is because it’s thought that the Bank of England (BoE) could cut its UK economic growth forecasts for 2019/20, when the central bank announces its latest interest rate decision today.

Historically, lower BoE economic growth forecasts tend to weigh on the value of sterling.

To explain, the Old Lady of Threadneedle Street, as the BoE is also affectionately known, looks likely to maintain UK interest rates at 0.75% today, when it announces its decision at 12.00 GMT.

This is both because the BoE has pledged to keep interest rates steady, while Brexit is ongoing, and because the UK will hold an election on December 12th, so the BoE wishes to be neutral, reports Reuters.

In particular, what with the UK’s future relationship with the EU still unclear after more than three-and-a-half years of negotiating, the BoE could keep borrowing costs steady, to provide a measure of stability to British businesses.

Meanwhile, ahead of Britons going to the polls next month, the central bank may keep interest rates steady, to avoid favouring any particular political party.

However, although the BoE looks set to maintain interest rates at 0.75% today, the central bank could nonetheless cut its UK economic growth forecasts for this year and next.

This is because there have been growing signs in recent weeks that the Brexit uncertainty is now weighing on the economy, with key data for October pointing to minimal economic growth or even stagnation.

For example, we’ve learnt recently that the UK’s manufacturing and construction industries remain in deep contraction, according to watchdog IHS Markit, while the UK’s vast services sector flatlined last month.

To be specific, the UK’s services PMI (Purchasing Managers Index) for October reached 50.0, exactly on the borderline that separates expanding activity from falling growth.

With this in mind, BoE Governor Mark Carney and his team on the Monetary Policy Committee (MPC) could today cut its 2019 economic growth forecast below its current 1.3%, and for 2020 too.

Moreover, according to some investors on the financial markets, the UK central bank may even signal that it intends to cut interest rates in the first half of next year. This would be to support UK growth.

For example, Oliver Harvey, a strategist at Deutsche Bank, says the pound "remains sensitive to the UK's domestic monetary policy. Should the MPC signal rate cuts are ahead, we'd expect... to see at least some short-term negative reaction in sterling."

As a result, if the BoE cuts its economic growth outlook today, or signals future interest rate cuts, this may affect the pound sterling.

AUD to GBP Exchange Rate Strengthens, as RBA Surprisingly Upbeat

In addition, another factor why the Australian dollar to pound interbank exchange rate has neared this three-week high today is because, earlier this week, the Reserve Bank of Australia (RBA) was unexpectedly optimistic about Australia’s economic outlook for this year and next.

In turn, it’s now thought unlikely that the RBA will cut interest rates in December, as previously thought, according to the Sydney Morning Herald.

This Tuesday 5th, Australia’s central bank kept borrowing costs at 0.75%, as widely forecast by the financial markets. In part, this is because the RBA has reduced interest rates three times in recent meetings, in June, July and October.

So it’s thought that the RBA is waiting for these cuts to “filter through” to Australia’s economy, to monitor their impact on terms of economic activity.

However, ahead of this Tuesday’s meeting, it was believed that the RBA would cut interest rates again in December, down to a new all-time low of 0.5%.

In the event though, Australia’s central bank was positive both about the domestic economic outlook, and the global growth picture. So it now looks unlikely that the RBA will reduce borrowing costs again, at last for the rest of 2019.

For example, in the RBA’s statement accompanying its interest rate decision this week, the central bank said that “The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range.”

So the RBA is encouraged by signs of stronger economic activity, following its rate cuts in June, July and October.

Moreover, according to David Plank at ANZ Bank, "A new sentence appeared at the start of the final paragraph [of the RBA statement] that supports our view that a rate cut in December is unlikely.”

This new sentence has contributed to convince the world’s money managers that the RBA will hold interest rates steady for now, thereby bolstering the value of the Australian dollar.

The Australian dollar historically tends to strengthen when the RBA keeps interest rates higher than forecast, because higher interest rates make investing Down Under more profitable.

In turn, this encourages the financial markets to buy AUD-denominated assets, to take advantage of these better returns on investment. So as investors buy more Australian dollars, its value increases.

Aussie Dollar Versus Sterling May Be Influenced, as RBA Still Forecast to Cut in 2020

However, looking to the next few months, the Australian dollar to pound interbank exchange rate could be affected, because it’s forecast that the RBA will still cut interest rates next year.

In particular, some investors on the financial markets think that Australia’s central bank is being overly-optimistic about the country’s economic growth outlook, which will prompt the RBA to cut, reports 9News.

First of all, it’s worth mentioning that the RBA this week signalled its willingness to reduce interest rates further in future if necessary.

According to the central bank’s monetary policy statement, "The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy.”

So this tells us that, even though Australia’s central bank strongly indicated that interest rates will now remain at 0.75% in December, the RBA isn’t necessary done easing monetary policy.

To the contrary, the RBA left the door open to reducing borrowing costs further if needed. This signals a pragmatic approach to Australia’s monetary policy, which many global investors have noted.

For example, Besa Deda, Chief Economist at St.George Bank, said following the RBA’s decision that: "We continue to expect another rate cut in February 2020. The RBA has maintained an easing bias, declaring in the final paragraph of its accompanying statement that it is prepared to ease monetary policy further if needed."

So this suggests that the RBA may cut again early next year. Similarly, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, says that:

"We remain of the view that further RBA monetary easing will be required and is likely. Growth is still likely to remain subdued and below trend for longer than the RBA is allowing. This will keep unemployment higher for longer and wages growth and inflation below target for longer."

In particular, it’s thought that the USA’s and China’s trade war could weigh down Australia’s economic growth in the coming months.

Australia trades heavily with both economic superpowers, so the fact that they’re imposing tariffs worth hundreds of billions of dollars on each other tends to cut their demand for Australia’s goods too. So this may affect the value of Australia’s currency.

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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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