GBP/AUD Pound Gains as Hope of UK Political Stability Increases

26.06.17
4 minute read
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The pound Australian dollar exchange rate strengthened on Monday as hopes increased of a more stable UK political environment in the works. The pound jumped 0.2% versus the Australian dollar as trading started for the week, taking the price to A$1.6840. This is the strongest level for the pound against the Australian dollar in a week.

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.

Hopes were raised in the UK on Sunday evening that the Conservatives and Northern Irish Democratic Unionist Party (DUP) were close to reaching a deal, which would secure a majority for UK Prime Minister Theresa May’s government in Parliament. On the June 8th snap election, the Conservatives failed to win the 326 seats required for a UK Parliamentary majority. The party, therefore, needs to get the backing of another party to ensure a majority in important votes in Parliament.

The first of important vote is on Wednesday and then on Thursday this week, when Parliament votes on the Queen’s Speech. A coalition style agreement ideally needs to be reached before these votes to ensure that Theresa May and her Conservative party stays in power. Any signs of this being the case should boost the pound as it implies that political uncertainty is receding.

How does political stability boost a currency?
Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.

Another quiet week for Australian economic data

Although demand for the Australian dollar was weaker than the demand for the pound, the Australian dollar still stayed afloat. Last week was an incredibly quiet week for Australian economic data that would make impact, but this week is set to be even quieter.

When Australian data is in short supply, other factors will tend to move the Aussie dollar such as the price of iron ore and gold. These are two of Australia’s biggest exports, so an increase in the price of these metals helps to boost the Australian dollar. Both gold and iron ore traded higher on Friday with iron ore prices at two and a half week highs.

Why does the price of iron ore impact the Australian dollar?
The reason behind the impact is because commodities, particularly iron ore, make up the bulk of Australian exports. Ultimately, Australian iron ore needs to be purchased using Australian dollars. So if the demand or expected demand for iron ore increases, then demand for the Australian dollar also increases. As the demand for the Australian dollar goes up, so does its value.

Looking ahead, the most influential piece of data could come from Tuesday’s first release of the 2016 census which will include the first batch of data concentrating on the questions relating to housing. Given the growing concerns of the Reserve Bank of Australia surrounding the housing market, the data could provide fresh insight on the underlying demand.

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