US-China Trade War causes investors to lose confidence in AUD

GBP/AUD – The pound has made gains against the Australian Dollar of late, predominantly due to investors looking for safe haven investments due to the ongoing trade war between China and the US. Beijing has said it will match US tariffs Dollar for Dollar which is a risky game considering Trump has promised further tariffs if there is Chinese retaliation. US officials are already preparing $100bn in additional tariffs should the Chinese go through with the rumored retaliation.

US total exports to China last year were an impressive at $130bn. A like for like retaliation from the Chinese would have to cover all US exports which could be very detrimental to China.

Due to Australia’s heavy reliance on China purchasing it’s raw materials the Australian Dollar has been losing value. The tariffs could hamper Chinese growth which is causing investor confidence to move away from riskier commodity based currencies.

Bank of England Interest Rate Outlook – Last week we saw the the Bank of England (BOE) interest rate decision, rates were kept on hold, but it appeared a rate hike was drawing closer. The Monetary Policy Committee (MPC) voted 6-3 against a hike which was up from the previous month 7-2. The markets reacted and we saw Sterling make gains against the Aussie.

Current polls are suggesting over a 50% chance of the BOE raising interest rates by 0.25% at the August meeting, and over 90% chance of a hike happening before the end of the year. I am not so convinced, one of the MPC members to vote in favour of a hike Ian McCafferty  is to be replaced by the more dovish Jonathan Haskel. It is unlikely Haskel will vote in favour of a hike in August and this could push a hike further down the road. In fact considering current economic data I do not think a rate hike will be  justifiable this year.

I am of the opinion Sterling is chroincally undervalued due to the lack of clarity surrounding Brexit, but short term there is very little reason for Sterling to make any substantial gains.  1.80 is currently a resistance point although it is being tested, personally considering the current economic situation if  GBP/AUD is in the 1.79s you are in a good position to trade.

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