Sterling has strengthened versus the Australian dollar, in part because markets are increasingly unsure if the Bank of England (BoE) will cut UK interest rates, when the central bank next convenes on January 30th.
Since late last week, investors have been raising the odds that the BoE may cut borrowing costs from 0.75% back to their all-time low of 0.5%. Although now, markets are also considering the possibility that the central bank might stay its hand.
Pound Strengthens on Signs of “Green Shoots”, Ahead of Next Week’s PMIs
There are signs of economic “green shoots” in the UK, following the Conservative Party’s decisive election win last month.
It’s thought that, for UK businesses, this has provided a degree of certainty both about the UK’s economic outlook, and regarding Brexit. As such, CEOs are beginning to raise their investment intentions.
For example, an Institute of Directors survey this week has found that, at the end of December, firms were their most confident about the outlook for the next year than any time since the survey started in January 2018.
In particular, the financial markets are waiting to see if there’s a post-election bounce, at next Friday 24th’s IHS Markit “flash” PMIs (Purchasing Managers’ Indices) for January 2020.
These will be the first clear indicator of whether activity has picked up in the UK’s key services and manufacturing industries, following the election.
Hence, depending on whether the data are upbeat or not, the BoE may be more or less likely to cut interest rates toward the end of this month. In turn, this could affect the pound.
Australian Dollar Could Be Affected, as RBA May Cut in Early February
Meanwhile, looking Down Under, investors continue to weigh the possibility that the Reserve Bank of Australia (RBA) will cut interest rates, when it next meets on February 4th.
If so, this would be to support the economy, during the ongoing bush fires. Were the RBA to cut borrowing costs from 0.75% down to 0.5%, their all-time low, this would traditionally weaken the Australian dollar.
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