GBP/AUD Continues 7 Month High on Weak Australian Iron Ore Prices

TransferWise content team
2 minute read

The pound Australian dollar exchange rate increased on Thursday, as weakness in both currencies battled it out with the pound coming out on top. The GBP/AUD hit a day’s high of AUS$1.7402, still some 1.3% away from its recent high earlier in the month. But, when taken on a broader perspective, the pound Australian dollar exchange rate is trading around its highest levels since September last year.

Interestingly the declining value of the Australian dollar ties in with a decline in the price of iron ore, which is also trading at the lowest level for 7 months. The price of iron ore is highly correlated to the Australian dollar because it is Australia’s largest single export earner, accounting for more than 15% of total exports.

Why does this matter? Australian iron ore needs to be purchased using Australian dollars. So if the demand or expected demand for the metal increases, the price of the metal increases. Meaning the demand for Australian dollar will also increase. The reverse is also true, which is what we’ve seen over the last seven months and what has helped boost the pound Australian exchange rate over the same period.

Soft UK GDP keeps GBP/AUD upwards trend capped

Meanwhile, demand for the pound was also weak. Albeit it stronger than demand for the Australian dollar as data showed that UK economic growth was not as great as expected in the first three months of the year. It rose by 0.2% - down from 0.3%. Delving deeper into the figures, estimated growth in the service sector, which accounts for around 80% of UK economic output, was revised down to 0.2% from 0.3% as households rein in their spending, with higher prices and lower wages starting to bite.

Why does this matter to the pound? Investors want to put their money into countries where growth prospects are strong. As such, they will tend to move investments out of weakening economies and into those perceived to be strengthening. As investments are sold off in the weakening economy, the supply of the local currency will increase and thus lower the value of the currency. So, when an economic indicator, such as growth comes in worse than expected or revised downwards, the value of that currency tends devalue.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content is the publication is accurate, complete or up to date.

TransferWise is the smart, new way to send money abroad.

Find out more

GBP/EUR: Brexit & UK GDP Under The Spotlight

The pound declined early on last week, before recovering losses later in the week. The pound euro exchange rate closed the week at €1.1425 approximately the...

TransferWise content team
11.02.19 3 minute read

GBP/USD: Dollar Drops On Dovish Fed, BoE Up Next

The pound US dollar exchange rate dived lower before rebounding and making back a good part of the losses. The pair dropped to a low of US$1.3147 on Brexit...

TransferWise content team
21.03.19 3 minute read

Tips, news and updates for your location