After a brief drop this morning the Pound Australian Dollar (GBP AUD) exchange rate rallied today following the release of some lacklustre economic data from China.
Australian Dollar (AUD) Weakened by Chinese Data
After initially surging this morning as geopolitical tensions around North Korea finally began to wane the Australia Dollar was forced to quickly retreat as it was undermined by the release of lacklustre economic data from China.
According to data released by China’s National Bureau of Statistics (NBS) this morning both Chinese factory output and retail sales fell more than expected in July following a particularly strong end to the second quarter.
The slowdown in industrial production was of particular concern for AUD investors thanks to China’s role as Australia’s single largest trading partner.
With the majority of Australia’s exports to China being raw materials used by Chinese factories in the production of goods, the news that factory output fell last month is likely to prompt speculation that trade volumes could subside again.
Julian Evans-Pritchard, China economist at Capital Economics, ‘The upshot is that both foreign and domestic demand appear to have softened at the start of the third quarter.’
‘A few sectors, such as steel, seem to have defied this slowdown in economic activity. But the strength in these areas likely won’t last given that policy tightening is set to further weigh on infrastructure and property investment in coming months.’
However analysts remain reasonably confident that China’s economy will remain reasonable robust over the coming months and that today slide is likely a correction after a surprisingly strong start to the year.
Pound (GBP) Strengthens as UK Cabinet Dismisses Fears of Split
Sterling rallied from its lows this morning as the UK government moved to allay fears that conflict is brewing within the cabinet.
In a joint statement in the Sunday Telegraph Chancellor Philip Hammond and Trade Secretary Liam Fox appeared to put aside their differences as they made a call for the UK to seek a post-Brexit transitional deal with the EU.
In regards to the potential transitional agreement, the pair were clear that it was being sought in an effort to help business adjust after Brexit and that it would not prevent a clean break from the EU.
The joint statement read, ’We are both clear that during this period the UK will be outside the single market and outside the customs union and will be a ‘third-country’ not party to EU treaties.’
The article is seen as attempt to show that Theresa May’s cabinet is unified after repeated reports that a split was forming between the hard-line Brexiters and those who seek a softer approach to Brexit.
Markets welcomed both the news that the UK government would seek a transitional arrangement with the EU and the perceived strife in the cabinet had been quelled, with hopes that it will allow Prime Minister Theresa May to focus more of making a success of Brexit.
GBP AUD Forecast: UK Inflation to Strengthen?
Looking ahead the GBP AUD exchange rate is likely to strengthen tomorrow following the release of the UK’s latest CPI figures, which economists forecasting that they will reveal that UK inflation climbed from 2.6% to 2.7% in July with investors hoping that it will put further pressure on the Bank of England (BoE) to tighten its monetary policy.
However rising concerns that soaring inflation is dragging on consumer spending and stifling the UK’s economic growth may temper any potential rise in Sterling, especially as wage growth remains weak.
Meanwhile the Australian Dollar may be pressured tomorrow by the release of the minutes from the Reserve Bank of Australia’s (RBA) latest monetary policy meeting as analysts predict that they will reaffirm the bank’s dovish outlook and plans to leave rates on hold for the foreseeable future.