GBP/AUD: Bushfire Concern Eases as BOE Talk Up Rate Cuts

The British pound is lower against the Australian dollar on Monday. The British currency fell across the board after another Bank of England policymaker hinted lower interest rates could be headed to UK shores this year. Better economic data from Australia has helped the Aussie dollar recoup some of the losses from last week.

GBP/AUD was lower by 118 pips (-0.62%) to 1.8808 as of 2pm GMT, taking the currency pair back to the lows of this year.

Wider markets remain optimistic that this Wednesday will see the US and China avert an escalating trade war by signing off on phase one of a trade deal.

The pound

The last two speeches made by Bank of England policymakers, including by the Governor Mark Carney last week and Gertjan Vlieghe over the weekend imply there is now a higher probability of a UK interest rate cut than an interest rate increase this year.

The apparent shift from a more neutral stance to being more dovish means the central bank is losing confidence that the UK economy will maintain stable prices and economic growth. The timing coincides with two big changes this year – the exit of the Bank of England governor and of course Britain leaving the European union. Uncertainty has been lessened around Brexit after last month’s election, but central bankers seem to be emphasising the unresolved future trading relationship between the EU and UK.

Worse-than-expected UK industrial production for November added to the losses in Sterling. A large decline of -1.2% month-over-month in industrial production against forecasts for a smaller -0.1% m/m drop deepened anxiety about the health of UKs industrial sector. Manufacturing production was disappointing too, dropping -1.7% m/m when economist has forecast a -0.3% drop.

The Aussie

The Australian currency has been devalued in recent weeks in response to the uncertainty surrounding the devastating bushfires in Australia. Some of the negativity towards its currency appear to be abating despite the bushfires continuing to ravage Australia. This has been aided by some improved economic data which suggests the Reserve Bank of Australia needn’t be too hasty in responding to the fire damage by cutting interest rates.