AUD/GBP Bullish after George Osborne Abandons Budget Surplus Targets
Two major headwinds from the fields of UK monetary policy and fiscal policy allowed AUD/GBP to make bullish gains on Friday.
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Australian Dollar Strong on Eve of Federal Elections
Risk appetite reappeared on Friday, boosting the Australian Dollar. Even a positive result from the US ISM Manufacturing index wasn’t enough to soften the ‘Aussie’s gains. Commodities and stocks were also on the rise, as ‘Brexit’ uncertainty waned even further as the weekend approached. Iron ore prices firmed, allowing shares in Australian mining companies to recover.
The Australian Dollar remained strong, despite it being the eve of the Federal elections .The historic ‘double-dissolution’ elections saw seats in the Senate up for contestation as well as those of the House of Representatives, as Prime Minister Malcolm Turnbull hoped to form a government that was more strongly populated with his supporters.
Pound Sterling Slumps on Carney and Osborne Dovishness
Recent comments from Mark Carney, Governor of the Bank of England (BoE), ended Pound Sterling’s rally after he strongly suggested monetary policy easing was on its way. This caused trader bets of a UK interest rate cut to soar to almost 70%, up from around 10% just before the referendum vote on the 23rd.
According to Vassili Serebriakov at Crédit Agricole;
‘Markets didn’t expect Governor Carney to come out this soon with a policy-easing signal. It really in our view highlights … that we haven’t hit the lows in the Pound yet.’
Further weakening the Pound was the news that Chancellor George Osborne was abandoning his self-imposed target of reaching a budget surplus by 2020. Osborne’s flagship economic policy, the targets had long been the focus of much scrutiny, with the Chancellor repeatedly failing to quite meet his goals. Despite the suggestions that he would have been forced to admit defeat regardless of the ‘Brexit’ vote, traders were shocked for the same reason Carney’s rate cut comments took them by surprise; it was a lot sooner than anticipated.
In announcing the measures, Osborne explained;
‘The referendum is expected to produce a significant negative economic shock to our economy. How we respond will determine the impact on jobs and growth. We must provide fiscal credibility, continuing to be tough on the deficit while being realistic about achieving a surplus by the end of the decade.’
Australian Dollar to Pound Sterling (AUD/GBP) Exchange Rate Forecast: RBA Policy Meeting and BoE Stability Statement Ahead
Tuesday is likely to be the most volatile day for the AUD/GBP pairing, thanks to key central bank events. First, the Reserve Bank of Australia (RBA) will meet to discuss monetary policy. Original forecasts were for no changes to be made to the official cash rate. However, since the UK’s ‘Brexit’ vote, some analysts are wondering whether the RBA may decide to cut rates immediately to pre-empt any ‘Brexit’-related shocks to the Australian economy.
Following on from the RBA policy decision will be the release of the BoE’s Financial Stability Report. Considering the markets awaited Mark Carney’s two post-vote speeches with baited breath, this publication promises to be of great interest to investors. Suggestions that there are ample measures in place to ensure market stability will boost Pound Sterling, while warnings of further easing will further weaken the UK unit.
AUD/GBP Conversion Rates
The Australian Dollar to Pound Sterling (AUD/GBP) exchange rate was trending between 0.5572 and 0.5644 during yesterday’s London session, while the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate traded between 1.7710 and 1.7937.