It has not been a good start to the week for sterling, with the pound-Australian dollar exchange rate continuing to fall lower on a combination of weakness with the pound and Australian dollar strength. The exchange rate dropped to AUD $1.7265, which is its lowest level in 3 weeks, before edging marginally higher to settle at AUD $1.7333.

Yesterday the pound dropped on political jitters, as polls showed the Conservatives’ lead narrowing in the upcoming general elections. Today the focus was on economic data, as the UK budget deficit showed the Government spent £10.4 billion more than it received in April, a rather unimpressive start to the new financial year. The report showed that VAT receipts stalled in April, which would indicate that the UK consumer is reining in their spending.This seems to indicate that the squeeze on the UK consumers purse continues, with the rise in prices out stripping wage growth. Given the UK economy’s reliance on consumer spending, these figures point to clouds gathering on the horizon for the UK economy which is considered negative for the pound

Australian dollar supported by strong consumer confidence

Demand for the Australian dollar remained strong for a second consecutive day, thanks, in part to another uptick in iron ore prices, Australia’s biggest export. Another factor which playe a role was the strong consumer confidence index reading, as measured by the ANZ-Roy Morgan Index.

Consumer confidence measures how confident people feel about their income stability. When consumers are confident in their futures and their future income stability, they tend to spend money and drive economic growth higher. This pushes the currency higher for two reasons. Firstly, strong economies attract foreign capital investment, because investors prefer to invest in economies with strong growth prospects. As local currency is needed for this, this increases demand and pushes up the currency value.

Secondly, economic growth spurs inflation on by making an interest rate increase more likely. Here’s how it works: The stronger the economy is, the higher the demand for workers becomes. As demand for workers increases, wages for those workers also increase. The more money workers take home as a salary, the more money they have to spend at retail stores, on cars and on houses. As demand for goods and services increase, the price for those goods and services also increases– in other words, inflation. Central Banks then increase interest rates to control inflation and higher interest rates attract more investment and the demand for the currency also increases.

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