The Australian Dollar posted strong gains against the Pound during last week’s session

Foreign Currency Market Update – GBP / AUD Update

The rumbling debt standoff in the US couldn’t stop the Australian Dollar posting strong gains against the Pound during last week’s session. The GBP AUD exchange rate had been trading above the 1.7400 threshold – within a fraction of a cent of its multi year high – during the early part of the week, but by the closing bell on Friday it had dropped back into the 1.6900s.

Ordinarily, an event like the federal budget row between Democrat and Republican lawmakers in the US, which brought a partial shutdown of government services last Tuesday, would sap investors’ appetite for risk, heaping pressure on the risk-sensitive Australian Dollar. The Aussie certainly experienced downside pressure in the lead up to the midnight 30th September deadline for a budgetary agreement in the US, but almost as soon as the 1st October D Day arrived without a deal and the world kept turning, the Australian unit began hovering up support.

As expected, Tuesday morning’s Reserve Bank of Australia policy decision yielded a ‘no change’ result, meaning that the nation’s key lending rate remains at a record low of 2.50%. However, for the second month on the trot, RBA Governor Glen Stevens’ accompanying statement revealed that his policy committee had discussed the possibility of an upward alteration to its headline Official Cash Rate. Analysts’ reaction to the development was somewhat delayed, but by the start of Friday’s European session the research departments of two of Australia’s leading retail banks had announced that they had pushed back their predictions for the timing of the RBA’s next rate cut. The increase in the price of Australia’s benchmark 10 year gilts which followed suggested that most investors were in agreement with their analysis and the Aussie recorded strong gains.

The positive performance from North American share indices during the second half of last week hints that most market participants feel that the current US debt standoff does not pose a risk to global growth. Unless this week’s session brings bad news then the Aussie is unlikely to suffer unduly because of the ongoing American political posturing. Given this, there appears a good likelihood that GBP AUD will continue to fall this week as investors continue to price-in a lower percentage chance of an RBA rate cut before Christmas. The next level to the downside for the pair comes at its 8-week low of 1.6874. However, a poor set of Australian jobs numbers on Thursday morning could potentially see the pair re-establish itself in the 1.7000s again.

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