The British pound is lower against the Australian dollar on Thursday in something of a catch-up move to the huge drops the pound saw against other currencies on Wednesday. Traders were waiting for Australian interest rates to be lowered, which they were.
GBP/AUD was down by 241 pips (-0.99%) to 1.9882 with a daily range of 1.9746 to 2.0863 as of 4.30pm GMT. The currency pair swung with incredible volatility, first rallying 600 pips before dropping another 800 pips to turn lower on the day.
With both central banks adding new monetary easing measures within hours of each other, the volatility in the British pound-Australian dollar exchange rate was extraordinary.
The pound initially rallied when interest rates were lowered in Australia but then later gave up all those gains and turned negative when the Bank of England did the same and more.
In theory, lower interest rates make a currency less attractive to hold relative to higher-yielding currencies. The effect is less clear when every central bank is taking interest rates to zero.
The Bank of England has lowered interest rates again to a new record low of 0.1%. New Governor Andrew Bailey and the Monetary Policy Committee (MPC) additionally voted to begin purchasing UK government bonds known as quantitative easing (QE).
However it’s possible to argue that the bulk of the blame for Sterling’s demise rests with the Prime Minister. Boris Johnson’s decision to finish EU trade negotiations by the end of 2020 means a trade deal with the EU will be almost impossible when every government resource is being put into fighting the coronavirus.
The Reserve Bank of Australia (RBA) cut interest rates by 0.25% on Thursday taking them to a new record low after having only cut them a week ago to 0.5% from 0.75%.
The RBA also agreed to begin the purchase of Australian bonds in a heavily signposted move. The program is targeting the yield on 3-year Australian government bonds so will work more like the Bank of Japan’s ‘yield curve control’ than outright QE seen from other major central banks including the Bank of England.