After a strong pound sell-off on Friday against the Australian dollar, the exchange rate has started the new week on slightly more solid footing. Pound weakness on Friday caused the pound Aussie dollar rate to drop from a high of A$1.6858 to a daily low of A$1.6737 for sterling on UK political uncertainty.
|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.
At the start of a fresh week, political jitters are once again at the forefront of investors’ minds. Not only is UK Prime Minister, Theresa May, fighting for her political life, but Brexit negotiations are also due to start today. Following Theresa May’s uninspiring performance in the UK general election a few weeks ago and a recently disastrous few days in office, her performance this week is paramount if she intends to stay as Britain’s Prime Minister.
Firstly, it’s essential that Theresa May completes coalition deal with Northern Ireland’s Democratic Unionist Party (DUP) in order to secure a majority in the Commons. This should be concluded in the next day or so. However, at what cost remains to be seen.
Secondly, on Wednesday during the Queen’s speech, Theresa May is slated to give an outline of the government’s legislative programme. In a show of her political strength, she’s announced that the normal one year Parliamentary session will last two full years – until after Britain leaves the EU. MP’s will be scrutinizing May’s performance in Wednesday’s debate to ensure she’s up to the job.
Finally, Brexit negotiations start today between Britain and the EU. Given the political instability in the UK, Britain is not in the best position to begin Brexit talks. However, that same political instability could end up supporting the pound over the medium term, as talk of a “soft” Brexit by the Chancellor of the Exchequer, Philip Hammond over the weekend has increased hopes that the UK government’s stance towards Brexit has softened. This “soft” approach would mean a greater priority being placed on jobs and trade with the EU following Brexit.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
Today’s session is set to be relatively quiet for the Australian dollar. Looking out across the week, Tuesday could potentially be an interesting day for the Australian dollar, as the Reserve Bank of Australia (RBA) meeting minutes will be released then. Some analysts are predicting a more upbeat stance from the RBA regarding the health of the Australian economy. Should this be the case, then the Australian dollar could strengthen in the early part of the week, pulling the pound Australian dollar exchange rate even lower for the pound.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.