On the day of the UK general elections the pound is set to dominate the pound Australian dollar exchange rate. The rate is at A$1.7178 as the pound regained lost ground following a better than expected Australian GDP.
|What do these figures mean?|
|When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.|
|For example, it could be written: 1 GBP = 1.72119 AUD|
|Here, £1 is equivalent to approximately A$1.72. This specifically measures the pound’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the pound.|
|Or, if you were looking at it the other way around: 1 AUD = 0.57677 GBP|
|In this example, A$1 is equivalent to approximately £0.58. This measures the Australian dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the Aussie dollar.|
Today Britain will vote for its next Prime Minister. And, whilst Theresa May leader of the UK Conservative party should win, the majority will most likely be slim. The latest YouGov polls pointed to Theresa May winning 334 seats, whilst Jeremy Corbyn, leader of the Labour party is forecast to win 269 seats. This would mean that the Conservatives would have a majority of just 8 seats in UK Parliament – almost no change to the current make-up. An outcome like the one predicted by the YouGov poll would mean that the Conservatives will not have the clear majority that Theresa May – and the pound – were banking on. A slim majority in this election will mean that the 50 or so Eurosceptic Conservative MP’s could cause disruption to the Brexit process as it moves through Parliament. Meaning a smooth Brexit is less likely – which could spook the pound.
|Why is a smooth Brexit good for the pound?|
|A smoother Brexit would be a scenario in which the economic consequences of leaving the European Union are minimised. This is favourable for the pound because the less the Brexit impact on the economy, the more likely that foreign investors will remain interested in the UK. Foreign investors need sterling to invest in the country and so the more GBP is purchased, the higher the demand and, thus, an increase in the currency’s value.|
The Australian dollar has had a volatile week. The Reserve Bank of Australia (RBA) kept interest rates on hold as many Bloomberg analysts had expected, however it was the accompanying statement which caused the Australian dollar to bounce.
The central bank actually sounded more upbeat about the Australian economy than investors thought they would be. Previously, the RBA had warned over the housing and labour markets and the impact they could have on the economy. However, at this meeting the RBA pleasantly surprised investors, raising economic growth expectations by stating growth is “expected to increase gradually over the next couple of years to above 3%”. Strong economic growth expectations tend to boost a currency, which is what we’ve seen in the Australian dollar across the board. Furthermore, economic growth data as measured by the GDP, came in higher than expected at 0.3% – giving an overall boost to the Australian dollar.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
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