Where next for GBPAUD exchange rates?

Australian dollar exchange rates will now be moving into a potentially volatile week as we get a series of major tier releases which could well move the currency markets. Most notably, on GBPAUD we could see big movement from the UK Bank of England interest rate decision on the 2nd August as well as on the evening of 1st when we get the latest US interest rate decision. With both decisions having such a dramatic effects, what can we expect  on the GBPAUD pairing?

Interest rates are a key driver on the Australian dollar and it is the raising and lowering of the central bank’s levels which causes the movements on the currency markets. Just like a higher interest rate will make a savings account more attractive to invest in, a higher interest rate on a currency will make that currency more attractive to hold.

A big driver on the Australian dollar has been the raising of US interest rates with the US dollar gaining in strength as the US Federal Reserve raise their base rate. With the US interest rate now higher than the Australian one, the Australian dollar has weakened as funds and investments are moved from the higher yielding Australian dollar to the now higher yield US dollar.

This move weakens the Australian and has seen GBPAUD level rising in recent weeks although just lately GBP weakness has dragged the pair back down lower. Expectations for next week and the two key central bank decisions could easily GBPAUD levels back towards 1.80. This would be if the US raise rates which would strengthen the US dollar and weaken the Australian. We would probably also need to see the Bank of England also raise rates too, to see the level above 1.80.

Some analysts, myself included, are sceptical over the Bank of England raising rates. If they fail to raise or perform a soft raise, which essentially writes out any future hikes, we could then see the pound drop. With much of the good news priced into a possible hike, it seems that clients holding on to see the pound rise could once again end up disappointed.

For more information on the best potential strategies to maximise your position please contact me Jonathan Watson by emailing jmw@currencies.co.uk

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