Pound to Australian dollar forecast: Tory leadership race leaves the pound with an uncertain outlook

And they’re off: The Conservative Party race gets underway

Theresa May officially stepped down as leader of the Conservative Party on Friday, triggering yet more Brexit fuelled uncertainty. Mrs May will remain as prime minister until her successor is elected – a race that begins in earnest today when nominations close at 5pm. If that person is a Eurosceptic, the risk of a no-deal Brexit could become a reality – a result that is likely to weigh heavily on the pound.
Meanwhile, leading Tory candidate, Michael Gove indicated he would rather delay Brexit than rush into a no-deal departure. Referring to the 31st October deadline, Mr Gove indicated that he’s ‘not wedded’ to the ‘arbitrary’ date; but suggested the delay would be weeks not months.
Despite this rush of activity – and subsequent uncertainty – in Westminster, the pound (GBP) to Australian dollar (AUD) rate was in relatively buoyant mood heading into the weekend. Even a significant rise in UK inflation expectations couldn’t check its stride.

Australian economic growth slows to a decade low

While the pound was wrestling with the effects of political uncertainty, it was economic uncertainty that had the AUD in a headlock earlier last week. Australia’s economic growth slowed to a decade low last quarter, as gross domestic product (GDP) growth tumbled under two per cent over the past year. The weakest GDP reading since the global financial crisis increased speculation that the Reserve Bank of Australia (RBA) will cut interest rates to further record lows before the year ends – aggressive monetary and fiscal stimulus that’s designed to stop the resource-rich nation from sliding into recession after 28 straight years of expansion.
The AUD came under further pressure on Friday after the Performance of Construction Index report revealed construction activity – the building of houses and apartments and jobs in the sector – contracted at its fastest rate in six years in May. The GBP to AUD pair continued its upward trajectory on the back of news that Australian home loans slumped further-than-forecast in April.

Looking ahead

As far as next week’s GBP to AUD forecast is concerned, investors will be closely monitoring Tuesday’s Average Earning Excluding Bonus and ILO Unemployment Rate figures from the UK. Followed by the Employment Change and Unemployment Rate figures Down Under on Thursday. Given the RBA’s current focus on employment, this data will be scrutinised for any signs the domestic job market has stalled again in May – another lacklustre reading could increase the likelihood of further rate cuts this year.
But it’s events in Westminster that will dominate sentiment towards the pound – and subsequently, the performance of the GBP to AUD pair – as the length and outcome of the Conservative Party leadership contest become clearer.
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