The Pound trampled all over the Australian Dollar at the beginning of last week’s session

Foreign Currency Market Update – GBP / AUD Update

The Pound trampled all over the Australian Dollar at the beginning of last week’s trading session to reach its highest level since August 2010. Sterling’s strong rallies were influenced by another set of dovish comments from the Reserve Bank of Australia with regards to future interest rate cuts.

The Sterling to Australian Dollar exchange rate improved by just over three cents between Monday and Tuesday last week in reaction to the RBA’s latest Minutes report, which showed that the domestic exchange rate is still considered slightly overvalued by the Australian Central Bank. With Chinese investment waning and mining output beginning to recede the RBA feel that a weaker Australian Dollar is needed to help Australian exporters gain a competitive edge.

GBP/AUD cashed in on a rather neutral FOMC Minutes report on Wednesday evening to touch a fresh 3-year high of 1.7483. Although the Federal Reserve Minutes showed that policymakers are split as to whether a tapering of QE3 is the right option at this juncture; the general gist of the report suggests that at least a small reduction of asset purchases will take place next month. This exacerbated fears that riskier assets such as the Australian Dollar will fall out of favour with investors when the liquidity-boosting Fed stimulus is taken out of the equation.

The Pound suffered a steep decline on Thursday, falling -1.8 cents from the 3-year high to settle close to 1.7300, as data out of China overshot analysts’ expectations. The shock Manufacturing PMI print of 50.1 in the world’s second largest economy threw a lifeline to perceived high-risk assets all over the world and was interpreted as particularly positive for the ‘Aussie’ Dollar because of the close trade relationship between the two Asian-Pacific nations.

Sterling fell further to 1.7220 on Friday but since then GBP/AUD has rallied by over a cent in response to the burgeoning conflict in Syria, which has swiped a massive hole out of global risk appetite.

There is very little on the Australian economic calendar this week so market sentiment is likely to be coloured by this afternoon’s Bank of England monetary policy speech from Governor Mark Carney. It is widely accepted that the Central Banker will attempt to temper rate hike speculation, but the jury is still out on whether he will be able to convince markets that rates will remain low until 2016. If Carney is unsuccessful in dampening hike speculation then GBP/AUD could drive forwards towards the 3-year high of 1.7483 struck last week, but if investors are suitably persuaded by the BoE man’s dovish rhetoric then a sharp move lower towards 1.7000 is entirely possible.

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