Despite its risk rally driven plummet at the beginning of the week, the British Pound to Australian Dollar (GBP/AUD) exchange rate has seen a strong recovery since Tuesday evening. This was due to a combination of factors including soft Brexit hopes, weaker risk-sentiment and some disappointing Australian ecostats.
After opening this week at the level of 1.7447, GBP/AUD plummeted by over two cents and briefly touched on an eleven month low of 1.7217. Since then though, GBP/AUD has recovered its weekly losses. On Wednesday, GBP/AUD continued to climb and at the time of writing was trending near a weekly high of 1.7529.
So far this looks to be another week of Brexit-driven movement for the Pound, with the British currency trending lower on UK government stability fears earlier in the week, before climbing on new soft Brexit hopes on Wednesday.
Tuesday evening turned out to be a tumultuous time for UK politics, the Brexit outlook and of course the Pound, as the UK government was defeated by multiple UK Parliament votes.
UK Parliament voted to have the UK government held in contempt of Parliament after the government refused to publish the legal advice it had been given over its planned Brexit deal.
This vote worsened concerns about the stability of the UK government and briefly sent the Pound lower, but the British currency recovered after a second vote for UK Parliament to take greater control in the next phase of the Brexit process.
With UK Parliament set to have more of a say in the next course of action if the Brexit bill is voted down in Parliament next week, investors became more hopeful that a ‘no-deal Brexit’ could be avoided and that Parliament would skew towards a softer Brexit.
The news also slightly buoyed light speculation that there could be a second referendum, or that the UK may end up not leaving the EU, which played part in Wednesday’s Sterling strength.
The Pound was able to easily capitalise against a weak Australian Dollar, as market risk-sentiment unravelled and the currency saw additional domestic pressure from some disappointing Australian growth data.
At the beginning of the week, the risky Australian Dollar surged in reaction to news that the US and China had announced a 90 day trade truce that would allow for negotiations and potentially de-escalation of long-lasting trade tensions.
However, this risk rally was short-lived as Tuesday evening saw US President Donald Trump once again taking a combative tone on the issue of US-China trade.
His tweet, in which he called himself a ‘tariff man’, dampened hopes that US-China trade relations were improving.
On top of this, Australia’s disappointing Q3 Gross Domestic Product (GDP) growth results left the Australian Dollar even weaker.
Australian growth was expected to slow to 0.6% quarter-on-quarter but fell to just 0.3%. The yearly growth rate unexpectedly fell from 3.1% to 2.8% rather than rising to the forecast 3.3%.
It indicated that Australia’s economic outlook was weaker than expected and this dampened Reserve Bank of Australia (RBA) interest rate hike bets as well as the Australian Dollar outlook.
Still, the Pound to Australian Dollar exchange rate’s potential for gains is limited, especially as Sterling remains highly volatile to Brexit developments.
The biggest upcoming event for the Pound outlook will be the UK Parliament vote on UK Prime Minister Theresa May’s Brexit deal on the 11th of December – which is now set to be even more pivotal than before.
If the deal is blocked by UK Parliament, it will mean that Parliament will take more control over how to handle the next step, rather than leaving it to the UK government. If the deal passes though, Prime Minister May’s Brexit deal will see a smoother path to completion.
Upcoming UK data is unlikely to be notably influential, but some Australian data could influence the Australian Dollar on Thursday.
Thursday will see the publication of Australia’s October trade balance and retail sales results, which could boost AUD demand and keep GBP/AUD under pressure if they impress.
On the other hand, weaker Australian data combined with continued US-China trade jitters may be the best chance the Pound to Australian Dollar exchange rate has at recovering further in the coming sessions.