GBP/AUD Looks Ahead to RBA Rate Decision and UK Elections

06.06.17
3 minute read
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The week ahead it set to be a busy one for the pound versus the Australian dollar. UK political jitters have been a principal driving factor in the exchange rate in the lead up to the elections on Thursday. However, this week also sees input from influential Australian factors coming into the equation as well.

The pound is trading at A$1.7300 versus the Australian dollar. A weakening pound has pulled the rate down from its recent high of A$1.7651 reached in May. However, the rate is still hovering around the highest level since September last year.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 GBP = 1.72119 AUD
Here, £1 is equivalent to approximately A$1.72. This specifically measures the pound’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around: 1 AUD = 0.57677 GBP
In this example, A$1 is equivalent to approximately £0.58. This measures the Australian dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the Aussie dollar.

UK election polls are causing volatility in pound exchange rates across the board. Political jitters stemming from polls prior to an election are often felt in the local currency. Yet, the polls seen in the UK in the run up to the election on June 8th vary substantially in the results they produce. The most recent polls range from putting Theresa May, leader of the UK Conservatives in the lead over Jeremy Corbyn, Labour party leader, by as much as 11 points. Whilst another poll puts the difference at just one point. These figures are quite significant because they are the difference between a hung parliament and an outright Conservative victory. The former being pound negative and the latter being pound positive, given that a solid Conservative majority is expected to a help a smooth Brexit become a reality.

Why is a smooth Brexit good for the pound?
A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.

No change expected from RBA, Australian GDP next up

The mood for the Australian dollar has been relatively strong against other currencies such as the dollar, although it’s been slightly weaker versus the pound. Investors will have plenty to digest as the week progresses. Firstly, the Reserve Bank of Australia (RBA) will set its interest rate. No changes are expected from the Australian central bank, so impact should be limited. However, if comments from the RBA show a strong tendency towards lowering rates over housing market concerns, then the Australian dollar could come under some selling pressure.

Focus will then shift towards the Australian economic growth reading, as measured by the GDP. Any signs that the domestic economy is starting to slow in Australia could put pressure on the Australian dollar, especially in the light of falling commodity prices.

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