Will the Aussie Dollar continue to strengthen?

AUD GBP Sinks After Reserve Bank Disappoints

As with many other currencies the Australian Dollar has posted strong gains against the pound in recent weeks. However, the difference here is that the dollar is actually only 0.5 cent away from a 27 year high against the pound. In fact the movements are quite staggering with the dollar gaining nearly 8% since the end of November 2011 and showing little sign of slowing down! Again great news for those selling, however anyone with a requirement to buy AUD could do well to take stock of their options as I feel a move back towards 1.50 unlikely. Below I will explain why.

The current economic conditions in the UK suggest we are very much heading on a path back towards recession. Only last week offficial GDP (Gross Domestic Product) figures showed the economy contracted in the final quarter of 2011 by -0.2% and another quarter of negative growth and we are officially back in recession. Yes we experienced a surprise increase in UK PMI (Purchasing Managers Index a indicator of manufacturing growth) yesterday, but this has done little to suggest that market conditions in the UK will improve. For this reason I feel the Pound will continue to struggle against the Aussie.

For those with an interest in AUD/EUR the picture to me is not so clear. The ongoing debacle within Europe will obviously keep pressure on the Euro. The simple market expectation would be for continued Euro weakness until a resolution to Europes debt problems are found. If a solution can be found, for which I personally believe they will, you would expect Euro strength. In this instance however we might actually experience further strength for the AUD. Why? The Aussie is classified as a riskier asset than say the US dollar and in times of increased economic confidence will often find its demand soar. This is partly due to the high levels of interest within Australia that make the currency a far more attractive option for an investor than say the Euro, Pound or US dollar. For this reason a resolution in Europe may lead to continued strength for the already strong Aussie, food for thought!!

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