News of a possible postponement of the UK’s exit from the European Union gave the British pound quite a boost in the first week of January 2019, a development that encouraged investors to hold onto their positions.
British MPs could delay Brexit if Prime Minister Theresa May’s proposed withdrawal agreement does not get enough votes, according to reports. The widely expected eventuality gave forex trading professionals hope for the pound. Analysts noted that this was a welcome reprieve from the onslaught of negativity that the UK has seen recently and provided a chance for the pound to bounce back.
No hard Brexit?
Weeks ago, there was a higher probability of a hard Brexit, and as expected, the UK’s currency took a hit. As news that a deal may still be possible made the headlines on Monday morning, investors with a GBP focus decided to buy back into the pound, according to reports. Analysts are still anxious, however, as the UK’s departure from the European Union is set to occur on 29th March at precisely 11pm UK time.
While the pound got some good news this week, those holding AUD positions against it are not faring well, despite some strategists advising that the AUD will gain strength in the months to come. However, there is light at the end of the tunnel, as investors can still trade the AUD against the EUR to see better rates.
The Brexit issue
If May gets her proposal through the House of Commons, then those living in the UK will not really feel any immediate impact, according to experts. Brexit will be akin to Y2K, when the fanfare was greater than the actual event. While no pandemonium is set to happen, there are varying opinions about the matter, and one thing is for sure – the pound will take somewhat of a beating.
May’s deal involves the payment of outstanding financial commitments amounting to £39bn. Britain would remain in the EU’s single market and customs union until the year 2020. During this one-year period, the British government and the EU would negotiate further in hopes of getting a better agreement in terms of trade. The bad news is that MPs will probably reject May’s proposal unless she finds a way to appease them or make the deal more palatable for both parties.
Experts believe that tensions are not going to let up, considering the reception of the proposal late last year. Investors are still expecting a hard Brexit, and this will likely make issues a lot worse for the GBP. The question of how low its value will sink is speculative, as there is no certainty on how the Brexit saga will end.
Diminishing worries – for now
The possible postponement of the Brexit deadline has reduced anxiety regarding the UK’s future, helping shore up the GBP against the AUD. The boost happened even though the UK and the EU have not yet agreed to an extension. If bad news makes the headlines in the coming days, then exchange rates will likely move for the AUD again.
According to experts, Brexit-based volatility will weigh on the pound in the coming days and weeks as financial markets prepare for the results of the proposed deal.
The pound still at risk
The pound should remain vulnerable to any Brexit development, but investors are also concerned about the latest Purchasing Managers’ Index (PMI) for the UK. Signs of weaker growth will put the GBP/AUD in a precarious position. November’s PMI gave investors mixed signals, but if the latest PMI is better, then exchange rates will improve.
Experts noted that a more resilient service sector can boost the pound’s value, as it will encourage greater confidence in the British economy. Further recovery should happen in Q1 of 2019 under this scenario. However, investors cannot help but dwell on the uncertainty of Brexit and its effect on the general economic outlook for the UK. The GPB/AUD is likely to struggle.
What is happening to the AUD?
As Chinese manufacturing slows down, the AUD is taking yet another hit. Based on recent data, China’s PMI decreased from 50.0 to 49.4, a development that does not favour the AUD at all. According to experts, China’s economic slowdown is encouraging investors to abandon the AUD for safer assets.
Global growth also looks bleak for 2019 and will likely result in a weaker AUD. While currency strategists believe that buying the AUD is still a good idea, it will not find a notable rallying point in the first week of the year.