Pound Versus Australian Dollar Driven By UK Political Developments

TransferWise content team
12.06.17
3 minute read

The pound Australian dollar exchange rate is seen edging marginally higher after striking close to a 7 week low on Friday, following the shock UK election results.

The pound Australian exchange rate hit a low of A$1.6771 following the UK election results, before rebounding to A$1.6960.

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 Conservative leader Theresa May failed to secure the necessary 326 seats for a working majority in UK Parliament. The snap election was supposed to put the UK on firmer footing for the upcoming Brexit negotiations. But, instead, the UK woke up on Friday to a hung parliament – exactly where it didn’t want to be. However, the UK Conservative party has managed to hash out a coalition agreement with Northern Ireland’s Democratic Unionist Party (DUP), but the union looks fragile. And, thus, a cloud of doubt is still hanging over the UK’s political future and the course of Brexit.

Theresa May appears to be hanging onto power by a thread. Over fears that possible replacement candidates could make UK Conservatives less popular, they have decided to continue backing May as Prime Minister for the time being. May has undoubtedly lost authority and, instead of going into Brexit negotiations with a strong mandate and a large majority, she’ll be sitting at the negotiation table in a weaker position. However, this may actually turn out to be a silver lining for the pound.

With Brexit negotiations due to start in a week, May’s weakened hand means she could struggle to charge ahead with the hard Brexit she was looking for. The likelihood of a softer Brexit has increased dramatically, which is pound positive. So, although sterling has been selling off, it could find support on hopes of coming through Brexit negotiations on more palatable terms and a softer Brexit

Why is a “Soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

With little in the way of high profile releases for the Australian dollar, the pound is set to drive the exchange rate. In addition to any further political developments impacting on the pound, UK economic data and the Bank of England interest rate decision will all be under the spotlight later in the week.

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