The Pound Australian Dollar (GBP/AUD) exchange rate strengthened on Thursday morning as more British retailers posted positive Christmas results, which cheered GBP investors.
At the time of writing, GBP/AUD was trading at around AU$1.76359, around 0.4% higher than the low hit just before the start of the European session.
The Pound (GBP) gained ground on Thursday morning after more UK retailers reported positive results for the Christmas period.
Retailer giant Marks & Spencer celebrated ‘a strong Christmas trading performance’, while supermarket chain Tesco also announced good results. Meanwhile, jewellery retailer Beaverbrooks reported its best December on record, boosted by bumper watch sales.
Although much of the increase in revenue is due to rising prices, rather than an increase in sales volume, the latest positive results do indicate that consumer demand remains fairly strong despite the worsening cost-of-living crisis.
‘Just like Sainsbury’s yesterday, Tesco and M&S both delivered solid statements today, highlighting that the UK grocery market held up over the Christmas period, despite fears around the cost of living squeeze. However, when you dig into the detail, much of this increase in revenue has come about due to price rises, rather than rising volumes.
‘That said, clearly customers were prepared to spend more money on food in the run up to Christmas. The worst case scenario with the UK consumer has not yet been realised as the cost of living squeeze has hit but not necessarily altered behaviour drastically. Whether or not this was people simply prioritising Christmas before tightening their belts will be a crucial question in future statements from the pair.’
GBP investors seemed optimistic that if consumer spending remains stronger than expected, the UK recession may not be as deep as initially feared.
Meanwhile, the Australian Dollar (AUD) was fairly muted on Thursday as worries about China’s current Covid surge weighed on the currency.
Australia’s export-oriented economy is highly reliant on China, its largest trading partner. As a result, concerns about the Chinese economy often impact AUD exchange rates.
Recently, China ended its zero-Covid policy following unprecedented public protests at strict lockdown laws. Since then, case numbers have rocketed across the country, due to a sudden easing of restrictions and very low immunity among the population.
As the lunar new year approaches, analysts expect many people in China to travel around visiting relatives, which could spread the virus even more. If case numbers continue to surge and hospitals are overwhelmed, there will undoubtedly be a negative impact on China’s economy.
These fears seemed to be weighing on the ‘Aussie’ Dollar on Thursday. However, a generally upbeat market mood and rising commodities prices may have limited losses for the risk- and resource-linked currency. Gold and iron – two of Australia’s most important exports – were both rising on Thursday morning, cushioning AUD’s downside.
Looking ahead, risk appetite could be a defining factor for the Pound Australian Dollar pair. If markets rally following the US inflation rate release, we could see the riskier ‘Aussie’ regain the smile against the safer Sterling.
On Friday, UK GDP is due out, and this could have a huge impact on the Pound. Forecasters expect the British economy to have contracted 0.2% in November. If the GDP report prints as expected, or worse, then GBP exchange rates could slump. With the UK economy expected to already be in a recession, signs that the downturn is intensifying will certainly trouble GBP investors.
However, if the UK economy performed better than expected then Sterling might rally.
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Adam Solomon
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