Will the Australian Dollar Feel the Impact of Brexit as Negotiations Continue?

The state of affairs in the UK at the moment is one filled with uncertainty. While the Brexit vote last year came as a surprise to many and caused immediate decline in the value of the pound, as well as causing havoc on the stock markets, things seemed to be calming down somewhat earlier this year when UK prime minister Theresa May announced that the plan was to leave the single market, putting an end to a lot of the uncertainty about what form of exit Britain would attempt to make.

Uncertainty at a New High in the UK

Confidence in the UK seemed to improve further when article 50 was invoked – not perhaps as an endorsement of the decision of UK voters to leave the European Union, but as a reaction to the fact that this, again, removed some uncertainty. When Theresa May announced there would be a snap general election, her approval ratings meant that most analysts saw her winning by a landslide, so this didn't seem to introduce much more risk.

However, as the election campaigns wore on, it seemed that the opposition managed to pull in more support than had been anticipated, and the shocking terrorist attacks in Manchester and London also added to the sense of chaos over in Britain. What arrived on election day was not the endorsement of the country that May had hoped would bolster her in Brexit negotiations, but a hung parliament – and this is a situation that hasn't yet been resolved as May has postponed her speech to the Queen to ask for permission to form a government with the support of the Northern Irish DUP.

Volatility

This has caused volatility for the pound, including against the Australian dollar. The Australian dollar is not as closely tied to the pound as to some other currencies despite the strong cultural links between the countries, however with both the pound and the Aussie dollar going through weaker periods, it is worth looking at whether Britain's fate in their Brexit negotiations could have a significant impact on the AUD. Right now, in the aftermath of the election, the pound is low against the dollar at around 1.67 – immediately before the election it was bouncing around the 1.73 mark, and had been consistently above 1.74 for much of May.

Watch Metal Prices

Brexit negotiations, other than any that affect trade with Australia, shouldn't in themselves cause too much direct concern for Australia's dollar. However, one factor that may impact the price of the AUD could be if the gold price rises as investors seek safe havens should uncertainty increase, or the UK markets suffer.

The AUD is also connected to iron ore prices, so should these be affected negatively by outcomes of Britain's trade negotiations, forex news may see movement in the AUD's price as a result, certainly of interest those involved in day trading.

Ultimately, it is the effects of Brexit discussions on metal prices that are most likely to touch on Australia, and it is also worth considering that the AUD is impacted by the USD quite significantly. When the US Fed raises interest rates, this is likely to have a knock-on effect on both the AUD and GBP, and this is more of a concern for watchers of Australian currency prices than the start of Brexit talks.

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P:41 V:au D:20180419 09:53:45