Pound to Australian Dollar Exchange Rate Back Above 2.0 Again

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The GBP to AUD exchange rate is back to 2.0 offering relief to those with imminent UK to Australia payment demands.

The Australian dollar's battering continues with markets continuing to shy away from the currency ahead of potentially more interest rate cuts at the Bank of Australia.

The British pound meanwhile enjoys a new-found 'favourite' tag amongst investors who are rapidly sending the currency back to fair value.

With the realisation dawning that the UK will likely vote to stay in Europe at the June referendum there is a lot of catch up to be done. Latest polling has solidified this realisation and clearly GBP/AUD belongs higher when the fundamentals of the UK economy are considered.

Fresh data out of the Australian economy concerning wages confirms inflation is likely to remain under pressure going forward.

Australian Data Points to a Struggle for the AUD Ahead

With the question of inflation being of utmost concern to the decision makers at the Reserve Bank of Australia (RBA) it is understandable that this month's release of wage price trends was going to be highly anticipated.

The wage price index rose just 2.1% y/y in the first quarter of 2016, the lowest rate on record in this series.

The pound to Australian dollar recovered the losses sustained over the previous 24 hours when the Australian unit rose following the publication of the Reserve Bank’s May meeting minutes. 

At the time of writing GBP/AUD is at 1.9846.

"Weak wage growth will keep inflation low. Today’s numbers suggest that growth is yet to stabilise on this measure. This suggests that the risks to the inflation outlook remain tilted to the downside, and household income growth will continue to be a constraint on consumer spending," says Felicity Emmett at ANZ Research.

The Australian dollar rallied as the minutes were widely interpreted as revealing reluctance on the part of the Board in deciding to cut interest rates, however, this interpretation may be placing an unwarranted spin on the document, according to several leading experts

The Aussie recovered after market commentators suggested the Board did not really want to cut rates but eventually decided to anyway, and therefore this was likely to be the last rate cut for a long time.

However, the suggestion that the May cut was of the “one-done-variety” may have been taking the interpretation of the minutes a step too far.

The debate hinges on one key sentence in the minutes:

“Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting. On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”

Whilst clearly showing that a lively debate pre-empted the decision and that members were “persuaded” that it would be positive on balance, there is nothing to suggest “reluctance” as such.

Nor is “persuaded” used in the context of implying active pressure or ‘persuasion’ , rather that members were persuaded by themselves that such a move would be the right decision.

August Meeting Still in 'Live' 

In a rapid-reaction note, ANZ’s Emmett, concurs that the minutes are not of the “one-and-done” variety, claiming the broader negative inflation picture was the real essence of the minutes, and that leaves the door open to future interest rate cuts:

“While there was no explicit bias in the minutes, this is normal practice in the press release and minutes released immediately post a rate cut. In our view, this does not imply that the rate cut was of the ‘one-and-done’ variety. The extent of the downgrade to the inflation forecasts in the SoMP strongly suggest that further easing is likely.”

ANZ still forecast a further cut in the RBA’s interest rate of 0.25% in August, bring the rate down to 1.5%.

This view was also supported by commentary from Capital Economics’ Paul Dale who said the language around the RBA’s first rate cut was similar to that of Tuesday’s minutes, implying it is probably not a signal they will not cut rates any further:

“The markets may conclude that the minutes of the Reserve Bank of Australia's May policy meeting imply that the Bank is less likely to follow the recent cut in interest rates to 1.75 per cent with another reduction to 1.50 per cent," he said.

"We disagree and believe that rates will be cut to 1.5 per cent at the August meeting.

"A lot of what happens next may then depend on the evolution of inflation expectations."

The AUD/USD rose from 0.7280s to the 07360s in the aftermath of the publication, which represents an over 1.0% gain.

Given the real possibility of further cuts signalled by market experts, however, this recovery is unlikely to prove sustainable, and the chart below, shows it is already waning.

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