GBP/AUD Outlook – May 2015

GBP/AUD declined a fraction in April, losing -0.3% for the month overall. The fractional decline in the cross was in part due to lower economic numbers from the UK, the interest rate differential and improving economic data out of Australia. UK numbers in April were lower than expected on balance, with Claimant Count Change, which declined -20.7K versus an expected -29.1K, while Retail Sales fell -0.5% versus an expected increase of +0.4%. Also, quarterly GDP increased only +0.3% compared to an expected increase of +0.5%, with the Trade Balance showing an expanding deficit of -10.3B versus -8.9B expected. Nevertheless, UK CPI came in flat for the month as was widely expected.

The BOE left its benchmark Official Bank Rate unchanged at 0.50% and the Asset Purchase Facility at 350B at its latest rate release on April 9th. The MPC Meeting Minutes for the April 9th meeting showed a unanimous vote on both the interest rate and the Asset Purchase Facility. The minutes concluded saying, “There was a range of views over the most likely future path of Bank Rate, but all members agreed that it was more likely than not that Bank Rate would rise over the three-year forecast period.” As of this writing, it appears that the UK Parliamentary general elections will probably end with a hung parliament.

Australian economic data was mostly in line with expectations in April showing significant improvement in the labour market. Employment Change increased by +37.7K versus +14.9K expected, while the Australian Unemployment Rate declined to 6.1% from a downwardly revised 6.2%.

The RBA left its benchmark Cash Rate unchanged last month, but lowered the rate by 25 bps to 2.0% at their latest meeting on May 5th as was widely expected. In his Statement on the Monetary Policy decision, Governor Stevens noted that, “The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices. At today’s meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.”

Due to the interest rate differential and improving economic conditions in both countries, the outlook for the cross is neutral in the near term and negative in the medium and long terms.