The British pound is lower against the Australian dollar on Wednesday.
The increasing possibility of negative interest rates in the United Kingdom following testimony from the Bank of England’s Andrew Bailey pulled the pound lower. A turnaround in market sentiment by the afternoon boosted the Australian dollar, which has been moving in sync with US stock indices.
Pound versus Australian dollar was down by 184 pips (-0.99%) to 1.8553 as of 4pm GMT.
GBP/AUD slumped below 1.87, dropping to new weekly lows at 1.855 and the lowest since early October last year. Yesterday the exchange rate rose +0.27% but for the week it is down again by -1.67%.
GBP: Bailey talks negative rates
The pound is facing a number of headwinds at the moment, one of which is the prospect of looser monetary policy from the Bank of England. BOE Governor Andrew Bailey told MPs in the Treasury Select Committee on Wednesday that the central bank has the lower bound for interest rates and negative interest rates under ‘active review’.
Having the policy under active review doesn’t mean it will be enacted but in ‘central bank speak’ these kinds of vague references to a policy are often used as a way to communicate to investors the possibility that new policy will come in further down the track.
As a reminder, the currency of country typically drops in value against other currencies when the interest rates of that country are expected to fall relative other countries.
AUD: Aussie correlating with S&P 500
This is one reason the Australian dollar is faring much better against the pound. Bailey’s testimony contrast with the Reserve Bank of Australia’s Philip Lowe who in minutes released yesterday left the door open to loser policy but has made a distinct point of having no intention to drop interest rates lower than 0.25%, the current level and a record low.
The Australian dollar has been correlating strongly with US stock markets, notably the S&P 500. The idea is that global businesses like the top 500-listed companies in America are sensitive to global growth, just like Australia, which is very dependent on its commodity exports.