The first economic update since the Coronavirus outbreak is due on Thursday, in the form of the July Economic Statement. The Australian Government will provide a full update of the state of the economy and hopefully some forecast as to where they think the countries economy is headed. Following this release, AUD to GBP volatility could be expected. There is a certain expectation that the damage done by Coronavirus will be severe, however it will be how quickly the Government believe the recovery will take that will be key.
Westpac’s Chief Economist Bill Evans over the weekend revealed the believe the deficit will be around 95 billion AUD which is 4.8% of GDP for 2019-2020. This will be followed by a further deficit of 240bn AUD in 2020-2021 and then a further 150bn AUD 2021-2022. These are big numbers and will put a lot of strain on the population over the next few years to rebalance the deficit.
There is a major concern that consumer confidence is low with some believing it is falling with the expectation of a second wave just around the corner. So many economies around the world were hoping for a swift V-shape recovery however it is clear that might not be the case for sometime. Australia has enforced some localised lockdowns in Melbourne and other areas with outbreaks, which suggests there is still very much a risk of further spikes.
The Australian dollar has remained at a constant level for the last few weeks hovering around the 0.55 mark against the Pound Sterling. This was following a significant gain for the Australian Dollar in the last few months when the rate was down below 0.50. There will be continued volatility over the course of the next few months as the dust settles on the coronavirus fallout. Sterling is also in a strange position as we move to only 5 months left before the end of the year and the final deadline for a Brexit trade deal.
Brexit Trade Deal Focus
Over the next few weeks I would not be surprised to hear that the UK and the EU have come to a top level agreement in how they think a trade deal will look going forwards. It is also good to note at this stage that the UK and US are currently in talks to have something in place the moment the UK has officially left the EU. This could well mean that a lot of the uncertainty Sterling has faced over the last few years could be lifted in a short space of time and we may see some support for the Pound.
GBP has been at the mercy of a No Deal Brexit since the Referendum vote in 2016 and it looks at the moment like it should be averted. The EU are currently focused on trying to resolve their latest bailout package for Covid-19 support but once that is concluded this week we should see some progress in the next few weeks I believe.
The phrase “landing zone” has been coined between the two sides and so often the rhetoric is negative that a deal won’t be achieved. However like most situations which involve the EU everything is done at the last minute, which means the talk of being further and further away from a deal strikes me as top level game playing. There will always be differences in negotiations and both sides will need to compromise at the end of the day.
Sterling however will be held to ransom unless there is some progress on the talks and its unlikely we may see the AUD/GBP rate to the 0.50 level or below anytime soon. If you’re looking at selling Australian Dollars into Sterling this could be a good window for you especially with the recent 10% gains as mentioned earlier in the article. If you’re a risk taker there is always a chance that the rate may move further in your favour but you never know with these things.
Both the Aussie and Pound have been under pressure and it doesn’t look like that is going to let off in the coming months. Make sure you’re keeping a close eye on the Australian news on Thursday and following the Brexit talks over the next 4-6 weeks to see if there are nay changes that could help the Pound. There are weekly talks between the two sides so there could be a snippet or soundbite at any point which could cause the market to move in response.