The Australian Dollar has seen a bout of strength this week, particularly the AUDGBP rate, as the Brexit deadline date looms, but there are concerns that AUD’s value could dip in the coming months if the RBA step in with further monetary stimulus measures. The RBA’s September policy meeting suggested that the bank would be prepared to step in with further measures and there was the suggestion of a ‘mini’ rate cut.
When there’s a suggestion of an interest rate cut, the currency in question tends to be devalued as it becomes less attractive for investors. The markets are currently expecting a rate cut to 0.10% at the RBA’s November meeting and this could result in a weakening of AUD. When it comes to monetary policy the RBA are taking into consideration conditions in the labour market and therefore jobs data from Australia next week could prove significant in the bank’s next decision on monetary policy.
How is Covid Affecting AUDGBP?
Another key factor in determining AUDGBP rate movement is the impact of COVID-19, with the UK and Australia seemingly on diverging paths in their fight to control the spread of the virus. Cases are on the rise in the UK with many local regions under tighter restrictions, whilst Australia’s virus hotspot, Melbourne, has reported their lowest two-week average of cases. As such it appears that although there have been lockdown measures in parts of Australia worst affected with have had a negative impact on the economy, it looks likely these measures will begin to be eased which should help economic growth and get the country out of its deepest recession on record.
On the flip side, with many UK regions under tighter restrictions, there were rumours in yesterday’s tabloids that further restrictions could come in across the country with bars and restaurants being shut. If that is the case, then we could see a significant impact once again on the health of the UK economy and therefore the value of the Pound. It is believed that an announcement could come on Monday, with a ‘three tiered’ lockdown system potentially being imposed depending on how fast the virus is spreading.
This morning UK GDP figures released for August have shown the UK economy continue its recovery from the initial lockdown measures introduced at the beginning of the pandemic, but at a slower pace than originally anticipated. The growth is also far lower than the numbers seen in June and July, and brings into question whether or not the ‘V shape’ recovery is set to continue. Markets will now be looking ahead to Monday’s address from PM Boris Johnson to give further clarity on what future lockdown measures could look like and therefore the impact on economic growth moving forward.
Will a Brexit Deal be Agreed in October?
GBP is also being shackled by the ongoing Brexit negotiations and there is still very little sign of a breakthrough being made between UK and EU negotiators in agreeing a deal. As we approach the EU summit on the 15th October, many believe that this will be a key date in terms of giving more concrete information on how likely it is that a Brexit deal is going to be agreed before the end of 2020 and the ‘transition period’. As such the coming weeks are likely to result in significant GBP volatility.
However, it would seem there is still some way to go before a deal is even close to being agreed, with the UK’s chief negotiator, Lord David Frost, stating earlier this week that the two sides are still at loggerheads over an agreement on UK fisheries. The EU’s view appears to be similar, after Charles Michel, the European Council President, has said that the UK needs to ‘put its cards on the table’ and warned the coming days are crucial if there is to be a breakthrough in talks.
Although it seems as though there’s not much the two sides agree on at present, they both certainly agree that a deal needs to be agreed by the end of this month on order for there to be enough time to have it signed off before the end of the transition period on 31st December this year. The UK have already said that they would be prepared to walk away if a deal can’t be reached before the end of this month and this could have serious ramifications for Sterling value.
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