GBP/AUD: EU Reveals Plans to Cut out the Square Mile

The British pound is lower against the Australian dollar on Wednesday afternoon following news the European Union will review the set of regulations that govern European financial markets, likely with the aim of cutting out the City of London. Earlier in the day the Reserve Bank of Australia Governor Lowe gave a speech following yesterday’s decision to keep interest rates steady.

GBP/AUD was lower by 140 pips (-0.73%) to 1.9190 394 with a daily price range of 1.918 to 1.937 as of 2.30pm GMT. The exchange rate added small early losses in the afternoon, tanking 100 pips in seconds to below the 1.92 handle. The losses add to the -0.32 decline on Tuesday, making a weekly loss of -0.89%.

Pound Sterling

It has been reported that officials in the major European capitals are looking to revise MFID II, the regulations that govern financial markets in Europe after Brexit. It is feared the changes would have the express purpose of cutting out the City of London from business areas that pertain to mainland Europe. Polices on trading in stocks, derivatives and commodities will likely all be changed, possibly forcing jobs and whole sectors out of London and into Dublin, Frankfurt, Paris or elsewhere. Financial Services is the UK’s biggest export and contributor to GDP and protecting it post-Brexit should be a key priority for the UK government.

The weakness in the pound might have been worse were it not for data showing a surprise acceleration in the UK service sector.

Australian Dollar

The Australian dollar had been making modest gains following a speech from RBA Governor Philip Lowe in which he called for bigger government spending. Although the long-term costs/benefits are up for debate, short term when a government spends more it will have a positive effect on economic growth, making it more likely that higher interest rates would be needed in tandem. Lowe described a “troubling decline in productivity” and said, “while the reasons for this are complex, it is hard to escape the conclusion that higher levels of spending would promote productivity growth and our collective living standards.”

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