Pound to Australian Dollar Falls After Leading Index Points to Growth in next three to Nine Months

GBP/AUD down after leading indicator suggests posiitve outlook for Australian economy

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The aussie rose versus the pound on Thursday after the Westpac-Melbourne Institute Leading Indicator (WBC/MI) rose 0.21% in May, which was higher than the 0.14% in April.

According to market analysts at St George Economics, this was a positive sign for growth in the next three to nine months:

"The WBC leading index improved, rising by 0.21% in May, after increasing by 0.14% in April. The index suggests the pace of economic growth in three to nine months will improve, although the pace of growth will be below trend. The improvement in the index was led by a stabilisation in commodity prices."

The aussie appeared to be outperforming the pound in mornign trade despite increasing bets the British people would vote to remain in the EU in their referendum on EU membership on Thursday.

The positive Australian data came on the back of a broadely upbeat RBA meeting minutes, which downplayed expectations of a near-term cut in interest rates.

GBP/AUD had fallen to 1.9568 at the time of writing.

RBA Optimistic

The RBA's June minutes showed members fairly optimistic about the outlook for the economy and even the outlook for the global economy, but that inflation and wage growth remained very limited.

Whilst commentators such as Hann’s Kunnen from St Georges Bank were upbeat about the minutes, suggesting it was not indicative of the RBA considering another rate cut, the exceptionally slow wage growth in the private sector and the deadening effect of that on inflation remained a concern.

“Wage growth had declined a little further in the March quarter and remained lower than suggested by the historical relationship between wage growth and the unemployment rate. The rise in the private sector component of the wage price index had been the lowest outcome for many years (with the exception of the September quarter 2009) and wage growth over the year to March was below its decade average in all industries.” (RBA minutes)

Global Risks Underplayed

In relation to China, Australia’s biggest export partner, the minutes said:

“Following a moderation in growth in the March quarter, some of the recent Chinese data had been more positive. Growth of industrial production and retail sales had picked up a little and conditions in the property market had improved somewhat, particularly in the larger cities.”

St Georges’ Kunnen, suggested the RBA underplayed global risks, which were conspicuous by their absence:

“What was missing from the minutes were comments on the risks facing the global economy, apart from concerns over the ‘Brexit’ vote. There was nothing in these minutes on debt levels in China or the impact of the stronger USD on US export growth. However, the board did note that output in east Asia was growing at a below average pace.” (St George Bank).

The Aussie dollar rose versus the US dollar following the release of the minutes but stalled against the pound as sterling strengthened itself on easing Brexit fears as polls continued to show the Uk would be likely to vote to stay in the EU.

Kunnen said they did not think the RBA would cut rates soon, but that they might in August as current accommodation would prove insufficient for raising inflation:

“Today’s RBA minutes did little to support the view that the RBA will cut rates again. The key to future rate cuts lies in inflation. If inflation moves lower and stays lower for longer than the RBA is currently expecting then a further cut or cuts would make sense.

We have a rate cut pencilled in for August as we believe the May rate cut alone will not achieve its aim of lifting inflation in the required time frame."

1.9760 next target higher

The GBP/AUD pair remains in a very short-term uptrend, after the gap up on Monday morning incresed the bullishness of the outlook.

The pair moved above the 1.9670 level, but failed to hit the 1.9760 target, which is the midpoint of the previous move, also known as the 50% Fibonacci retracement, a level which would be expected to provide an obstacle to further gains. 

It has temporarily pulled-back but not very sharply, and it is expected to resume eventually, and move up to its target, with a break above Monday's newly established highs at 1.9738 providing bullish reconfirmation.

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The pound's outperformance may be short-lived, however, according to Lloyds Commercial Banking's Head of Economics Adam Chester, who is bullish for the Aussie given recent strong data:

"Recent Australian data have been strong - the unemployment rate (5.7%) and Q1 GDP (3.1% on an annualised basis) were both stronger than consensus and the trade deficit narrowed substantially (from A$2.2bn to A$1.6bn) - underpinning RBA Governor Steven's more upbeat tone recently. While inflation remains muted, and poses a risk of additional policy loosening from  the RBA, we believe economic data will remain robust and forecast."

At its June meeting the RBA chose not to cut rates as some had expected, leading to a recovery move in the Australian Dollar, since currencies rise and fall in line with interest rates due to changing demand from international investors seeking higher returns.