By Jon Beddell
Foreign Currency Market Update – GBP / AUD Update
UK industrial production fell 1.2% on the year in figures released last week, compared to expectations of no change. That was largely accounted for by a 1.7% fall in the month of April. Interest rates were kept on hold in perhaps the least sensational BoE announcement in recent times. Everyone is now expecting rates to remain sharply unchanged for the next few months. We won’t know how the voting went until June 22nd when the minutes are released. There will likely be a further shift toward inaction with the departure of hawk Andrew Sentance.
Inflation data out yesterday showed a moderation in both retail prices (up 5.2%) and core price inflation (up 3.3% compared to 3.7% last time), both figures being below expectations. This didn’t really dent Sterling because no one was expecting the Bank of England to raise interest rates anyway.
The Reserve Bank of Australia also elected to keep interest rates on hold last week, but at 4.75% compared to just 0.5% in the UK. The exchange rate may be close to record lows, but there remains a significant interest rate advantage in holding Aussie dollars. That advantage was expected to increase, if not this month then next. However, the RBA took the opportunity to dampen expectations of a further rate hike in the near term, citing a moderating inflation outlook.
The technical outlook remains precarious. Since making the record low just above 1.50 in May we’ve spent the last few weeks in a holding pattern. There’s been no strong indication that Sterling is about to break out of the downtrend. If anything it looks like Sterling is awaiting the next blow to drive it lower. Without any clear catalyst for improvement we advise Aussie dollar buyers to cover any exposure now, using a forward contract if you don’t need your currency straight away.