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Pound to Australian Dollar at 1-Week High, as Boris Awaits EU Reply

Market CommentaryPound to Australian Dollar at 1-Week High, as Boris Awaits EU Reply
Pound to Australian Dollar at 1-Week High, as Boris Awaits EU Reply
Pound to Australian Dollar.

The pound to Australian dollar interbank exchange rate has hit 1.8396 in the last day, its highest in one week, or since Wednesday 25th September.

By comparison, back on Saturday 28th September, British sterling was as low as 1.8163 versus the so-called Aussie dollar, so it’s since strengthened by +1.28%.

This could benefit you, because when you transfer money to Australia from the UK, you might get a higher Australian dollar total, compared to if you’d exchanged currencies in the last week.

In turn, this might make it more affordable for you if you’re emigrating to Sydney or Melbourne, or if you’re a UK business owner buying currency for your business Down Under.

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

Also, to check what’s affecting the value of sterling versus the Aussie dollar, visit Pure FX’s GBP to AUD Exchange Rate Updates page. Here, click on the most recent article to read the news.

One reason why the pound has reached this one-week high against the Australian dollar is because the EU hasn’t rejected UK Prime Minister (PM) Boris Johnson’s “final offer” of a Brexit agreement.

Another factor why sterling has gained in value against the Aussie dollar is because it’s been reported that the EU will agree to extend the UK’s Brexit deadline, even if Mr. Johnson doesn’t ask.

A third explanation why the pound to Australian dollar interbank exchange rate has risen is because the Reserve Bank of Australia (RBA) cut interest rates to a new all-time low earlier this week.

Pound to Australian Dollar Rises, as Boris Awaits EU’s Brexit Response

One reason why the pound to Australian dollar interbank exchange rate has reached this one-week high is because PM Johnson officially sent the UK’s “final offer” of a Brexit deal to the European Union (EU) yesterday, and Mr. Johnson is now waiting for a reply.

It’s been taken as a positive sign that Brussels hasn’t immediately responded by publicly rejecting the proposals, according to Reuters.

Mr. Johnson’s proposals aim to amend the so-called Northern Irish “backstop”, in the UK’s existing draft Brexit Withdrawal Agreement.

According to the existing draft, if the UK and the EU can’t agree a future trade deal, then all of the UK would remain in the EU’s Customs Union, to ensure there’s no hard border on Ireland. However, this would prevent the UK from pursuing its own trade deals.

To amend the “backstop”, Mr. Johnson has proposed what’s being called the “two borders for four years” plan.

Here, Northern Ireland would retain the EU’s rules for agricultural produce and factory goods up to 2025, at which point the Stormont assembly would decide whether to follow the UK’s or the EU’s customs norms. Other products would be examined away from the border.

In Mr. Johnson’s letter to Jean-Claude Juncker, the European Commission (EC) President, the PM describes the proposals as “fair and reasonable”. So far, the EU hasn’t rejected the proposals, which it’s thought is positive.

For example, Mr. Juncker has informally said that Mr. Johnson’s plans contain “positive advances”, although there are also “problematic points” to be addressed, such as regarding policing.

Meanwhile, Ireland’s Taoiseach (Prime Minister) Leo Varadkar has responded that the proposals do not "fully meet the agreed objectives”.

However, Mr. Varadkar has not outright attacked Mr. Johnson’s plans, which suggests that the Irish Prime Minister is eager to reach a compromise with the UK. This bodes well for the possibility of a Brexit agreement in the foreseeable future.

For example, Timothy Fox, Chief Economist at Emirates NBD, said about Mr. Johnson’s proposals yesterday that:

"If Brussels can be persuaded to support the initiative it appears that PM Johnson might be able to garner enough support in Parliament to back it as well, suggesting that this is probably the closest the two side might come to finally reaching a deal." This has helped lift sterling.

GBP to AUD Strengthens, as EU May Bypass Boris to Extend Brexit Deadline

In addition, another factor why the pound to Australian dollar interbank exchange rate has hit this one-week high is because it’s been reported that, even if PM Johnson doesn’t ask the EU to extend the UK’s Brexit deadline, the EU is willing to grant an extension.

This has strengthened sterling, because this further reduces the odds that there’ll be a ‘No Deal’ Brexit by October 31st.

According to The Times, an EU source says that, if Mr. Johnson doesn’t request to extend Article 50, the UK’s Brexit timetable, then Brussels is willing for another senior UK government figure to do this on the UK’s behalf.

This might be a senior civil servant, and the source mentions Sir Mark Sedwill, the Cabinet Secretary, or Sir Tim Barrow, the UK’s EU ambassador.

It’s possible that Mr. Johnson might not request a second Brexit extension, even though he’s legally obliged to. To explain, last month opposition MPs in Parliament passed what’s called the Benn Act.

This obligates Mr. Johnson to ask for more time to negotiate Brexit, if there’s no agreement in place by October 19th, two days after a crucial EU summit. This is to avoid the possibility of a ‘No Deal’ Brexit at the end of October.

However, the PM has repeatedly said that he’ll refuse to comply with the Benn Act, while also saying that he’ll obey the Rule of Law.

For example, at Mr. Johnson’s headline speech at the Conservative Party’s conference in Manchester yesterday, the PM repeated his pledge to exit the EU by October 31st “come what may”. So it’s not clear how Mr. Johnson will get around the Benn Act.

The Times article raises the probability that the UK will remain in the EU after October, reducing the odds that we’ll exit without an agreement, which it’s thought would hurt the UK’s economy. So this has strengthened the pound.

Sterling Strengthens Versus Aussie Dollar, as RBA Cuts Interest Rates

Moreover, a third explanation why the pound to Australian dollar interbank exchange rate has reached this one-week high is because, earlier this week, Australia’s central bank, the Reserve Bank of Australia (RBA), cut interest rates to a new all-time low.

This has weakened the Australian dollar, because this suggests that Australia’s economy needs greater monetary support to prosper, and because lower Australian interest rates make buying AUD-denominated assets less profitable for the world’s money managers.

This Tuesday 1st October, the RBA reduced interest rates by -0.25%, to 0.75%, a historical low. The move was widely forecast by financial markets, reports The Sydney Morning Herald.

Australia’s central bank cut interest rates, first to try and cut unemployment Down Under, which at 5.3% is well above the RBA’s goal of 4.5%. Second, the RBA intends to lift inflation above its current 1.6% to the target band of 2.0%-3.0%.

Moreover, the Reserve Bank strongly signalled that it may cut interest rates further in future. In the RBA’s accompanying statement, it said that it will conduct policy to achieve “full employment and the inflation target”.

By comparison, in the past the RBA has said that it aim for “more assured progress” towards these goals. So it looks like the RBA is now setting itself a harder objective.

Following the RBA’s decision, the financial markets forecast that Australia’s interest rates will fall to 0.36% by November 2020. So this tells us the world’s money managers expect Australia’s central bank to cut once or twice more in the next 13 months.

This indicates that Australia’s economy will need even easier monetary policy in future, and would make buying AUD assets even less attractive, thereby weakening the Australian dollar.

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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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