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GBP AUD Exchange Rate Slips on Faltering UK Consumer Confidence

December 21, 2017 - Written by

An unexpected dip in December’s GfK consumer confidence index saw the Pound Australian Dollar exchange rate struggling to gain any real traction.

Investors were not encouraged to find that the index had slipped from -12 to -13, indicating that consumers are ending the year on a more negative note.

This continued decline is largely attributable to the ongoing wage squeeze and the uncertainty that still surrounds Brexit, with consumers prompted to take a more cautious outlook as a result.

Even so, the GBP AUD exchange rate was able to hold onto a narrow uptrend on Thursday morning thanks to an absence of any fresh Australian data.

With investors lacking any particular incentive to favour the Australian Dollar over its rival this kept something of a floor under the GBP AUD exchange rate.

Brexit Uncertainty Continues to Dominate GBP AUD Outlook

The appeal of the Pound was further weighed down by November’s public sector net borrowing figure, however, despite the measure showing a smaller uptick than forecast.

As new government debt still rose 8.12 billion on the month this gave investors little cause for confidence, with borrowing looking set to rise further over the coming months.

With the UK economy still appearing to be in a less robust state of health GBP exchange rates naturally came under pressure.

Worries over Brexit are likely to continue to hamper any Sterling strength for the foreseeable future, even with talks now progressing to their second phase.

As analysts at ING commented:

‘The UK has reportedly agreed to meet all of the financial commitments set out by the EU earlier this year. They have also accepted that the European Court of Justice will have a role to play in policing citizens’ rights, formally a big red line for the UK government.

‘But the big sticking point was the Irish border. The wording agreed earlier in the week, which committed to "no regulatory divergence" on the island of Ireland, raised fears within the Democratic Unionist Party (DUP) that this could weaken Northern Ireland's access to the UK internal market. But a series of additional commitments - including one that guarantees "unfettered access" for Northern Ireland to the overall UK market - appears to have reassured the DUP.’

While some issues have been resolved, for the time being, there is still significant uncertainty over the likely shape of the future trading relationship between the UK and EU.

As recent data has further highlighted the UK’s reliance on exports this leaves the GBP AUD exchange rate vulnerable to increased downside pressure further down the line.

Even though no change is expected from the final third quarter gross domestic product report this may still offer the Pound some degree of support ahead of the weekend.

Limited Odds of RBA Hawkishness Weigh Down AUD

With no Australian data set for release ahead of the Christmas break the Australian Dollar has been left to the whims of wider market sentiment.

However, with trading volumes starting to thin in anticipation of the holiday season the downside bias of AUD exchange rates has been somewhat limited.

In the longer term, though, the antipodean currency could struggle to remain on a strong footing against its rivals.

The odds of any imminent return to a monetary tightening bias for the Reserve Bank of Australia (RBA) still appear rather low at this juncture, keeping a lid of the ‘Aussie’.

Analysts at NAB noted:

‘The RBA will be reluctant to raise rates until there are reliable signs that wages growth and inflation are moving in the right direction, especially as the cooling housing market has simultaneously lessened the urgency for RBA rate hikes. However, we expect that stronger labour market conditions will see wage growth lift over time. Additionally, the RBA’s concerns around household balance sheets are unlikely to dissipate, especially as levels of household debt continue to rise faster than incomes. On balance, for now, we retain our view that the RBA will begin gradually lifting interest rates in H2 2018 as the unemployment rate falls further.’

Any renewed strengthening of the US Dollar could also give the GBP AUD exchange rate a boost in the near term.
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