GBP/AUD: Pound Hits Two-Week Low against Aussie

The British pound was lower against the Australian dollar on Tuesday as markets reacted positively to the Reserve Bank of Australia lowering interest rates. At the same time markets have now fully priced in a rate cut from the Bank of England later this month after the Federal Reserve conducted an emergency 50 basis point rate cut.

GBP/AUD was down by 162 pips (-0.87%) to 1.9331 with a daily price range of 1.9309 to 1.9612 as of 3pm GMT.

Today’s drop takes GBP/AUD to a two-week low with losses in just the past two days amounting to -1.79%.

The British pound

Futures markets which predict the next moves in UK interest rates now fully expect the Bank of England to lower interest rates at its next meeting in March.  The odds had been around 80% until the Federal Reserve announced a shock ‘emergency rate cut’ of 50 basis points, or half a percentage point.

Bank of England Governor Mark Carney made a few remarks on his final day in the job to the Treasury Select Committee. Carney said the impact on the British economy “could prove large” but he expects to see one or two quarters of impact on growth. In another clue UK rate could be set to fall again, Carney said the policy response should entail “a mix of fiscal and central bank elements.”

The Australian dollar

Economists have been raising their GDP forecasts for Australia after the Reserve Bank of Australia (RBA) cut interest rates in Australia to a record low. Typically the response to lower interest rates means that currency traders will sell the currency because of the lower yield received for holding it. But the selling in the Aussie has been taking place for over two months. Now that the event has happened, traders are interpreting the move as a boost to the Australian economy.

The basis for the RBA decision was of course to support the economy during the coronavirus outbreak. The bank said it could ease policy further if needed to support sustainable growth, also noting that Australian financial markets had been operating efficiently but that it would ensure the system has sufficient liquidity.

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