GBP to AUD Exchange Rate Fails to Recover Despite Unexpected Australian Trade Deficit

January 5, 2018 - Written by Frank Davies

STORY LINK GBP to AUD Exchange Rate Fails to Recover Despite Unexpected Australian Trade Deficit

Despite this week’s UK services stats beating expectations and an unexpected Australian trade deficit weighing on the ‘Aussie’, the British Pound to Australian Dollar exchange rate continued to fluctuate near its weekly lows on Friday. The Australian Dollar has been supported by risk-sentiment.

After opening this week at the level of 1.7279, GBP/AUD briefly touched on a fortnight high of 1.7412 on Wednesday morning before tumbling back down to a monthly low of 1.7221 on Thursday. The pair continued to trend below the week’s opening levels on Friday morning.

GBP Fails to Find Strength in Latest UK Data

The first week of 2018 saw the publication of Markit’s December PMIs for the UK, which generally indicated that Britain’s economy was still growing steadily despite widespread uncertainties about the Brexit process.

The most notable of the prints was Markit’s services PMI, as services account for a notable chunk of Britain’s Gross Domestic Product (GDP).

UK services were forecast to rise from 53.8 to 54.1, the result of 54.2 was something of a pleasant surprise. However, the report also gave analysts little reason for optimism, as it included warnings about the risks the services sector could continue to see in the coming months.

According to Duncan Brock, director of customer relations from the Chartered Institute of Procurement & Supply;

‘Subdued sales growth demonstrates that underlying risk remains in terms of the economic outlook, with business confidence and investment spending closely aligned to progress in the Brexit negotiations. Bigger purchases are still being delayed until uncertainty diminishes, and combined with higher operating costs experienced by companies, will add a further dampener to progress in the sector.’

Concern about Britain’s economic outlook is largely underlined by the Brexit process, which will see the second phase of UK-EU negotiations taking place throughout 2018.

With markets still uncertain what kind of Brexit will be likely and how it could impact Britain’s economic activity, traders are hesitant to buy back the Pound on the back of some slightly better than expected services stats.

At the time same, many Brexit risks are already priced into Pound trade meaning it’s unlikely for the British currency to become much weaker either.

AUD Holds Ground Despite Sudden Trade Deficit

Australia’s trade balance printed an unexpected deficit in its November report, which was published during Friday’s Asian session.

The figure was forecast to come in at around A$0.55b, but instead tumbled to a deficit of A$-0.628b. The previous figure was also revised lower, from A$0.10b to A$-0.302b.

This was the largest deficit in over a year and the first back to back deficit since October 2016.

Australia’s December PMIs from AiG, published earlier in the week, also failed to be particularly impressive, both registering slight gains over previous figures.

Despite this though, the Australian Dollar has avoided falling against the Pound this week. That has largely been due to market appetite for risky, commodity-correlated currencies.

Commodity prices, such as iron ore, have seen strong performance in recent sessions and this on top of US Dollar (USD) weakness has left the risky Australian Dollar more appealing than Sterling.

GBP/AUD Forecast: Brexit News and Australian Retail Data Ahead

Next week’s UK economic calendar will be a little quieter, with the most notable data coming in on Wednesday. UK trade balance stats and production data from November will be published.

Besides that, Pound trade could become increasingly focused on the Brexit process once again, as UK Parliament will reconvene from the winter recess.

As the UK government cabinet still faces splits between those advocating a soft Brexit and those who want a hard Brexit, investors will be looking for signs on which kind of Brexit the UK government will fight for in upcoming UK-EU trade negotiations.

The second phase of Brexit talks are not set to formally begin until March, so market anxiety is likely to persist for the coming months.

The Australian Dollar, on the other hand, could be influenced by upcoming Australian business confidence data and retail sales stats.

If these results beat expectations, it could boost market hopes that Australia’s economy is improving and that this could boost Reserve Bank of Australia (RBA) hawkishness over the coming months.

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TAGS: Pound Australian Dollar Forecasts