The pound to Australian dollar exchange rate has made excellent gains this week with rates for the GBP AUD pair breaking over 1.86 once again. Much of the positive movement has arisen from optimism that a compromise agreement between the Conservative and Labour parties will be reached and thus avoid the need for Britain to contest the European elections. If the withdrawal agreement can be voted through parliament with cross party support then this should be seen as positive for the pound and the markets are already starting to price in this outcome.
The existing withdrawal agreement keeps close ties between Britain and the EU and could see investment in Britain restored to past levels. The debate at the moment is whether the UK will adopt some form of a customs union which would result in a softer form of Brexit, something that should be seen as positive for the pound. Rates for GBP to AUD are likely to see further volatility as the detail of these cross party talks is revealed. There is the potential for a spike higher for GBP vs AUD on the back of a deal although gains are likely to be limited as Brexit will still take a considerable amount of time to deliver. Remember, the withdrawal agreement will only then take Brexit negotiations to the next stage which will cover the thorny issue of trade and this could see another highly volatile period for the GBP to AUD pair.
Today does see UK local elections and reports indicate that the conservative party could lose a number of their councillor seats muddying the political picture if there is a general election or if the European elections do still go ahead.
The Reserve Bank of Australia (RBA) will meet next week and there is a chance of an interest rate cut which has resulted in Australian dollar weakness. Last week saw disappointing inflation data which is putting pressure on the Aussie and some commentators are putting the chances of a rate cut next Tuesday at 50%. Expect a big market reaction either way and if the central bank doesn’t deliver a rate cut then there could be a rally in the Australian dollar reversing some of the weakness in the Australian dollar. The RBA will be loathed to lower rates further unless absolutely necessary which makes this interest rate decision particularly interesting.
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