Contrary to expectations the UK Consumer Price Index dipped in October, falling back to 0.9% rather than rising to 1.1% as forecast. This more limited display of inflationary pressure encouraged greater demand for the Pound, despite it being accompanied by a particularly sharp increase in producer prices. Despite the fact that inflation still looks set to accelerate sharply in the coming months the GBP AUD exchange rate trended higher, particularly after the latest raft of domestic wage data proved to be encouraging.
Investors were discouraged by the Australian labour market data for October, meanwhile, despite the headline unemployment rate remaining steady at 5.6%. This was due to the level of weakness implied by the underlying details of the report, with the participation rate failing to show any improvement on the month. As a result, the steadiness of the unemployment rate was thanks to a lack of fresh labour joining the market; something which does not bode overly well for the outlook of the domestic economy.
As Reserve Bank of Australia (RBA) policymakers had highlighted concerns relating to the labour market in November’s policy meeting minutes, this naturally weighed down the antipodean currency. Speculation that the RBA could return to an easing bias was also prompted by the increased hawkishness of the Federal Reserve, and the heightened chances of a December interest rate hike. With the Fed returning to its monetary tightening cycle, the US Dollar has found fresh support, something which limits the appeal of the commodity-correlated ‘Aussie’.
More Limited Autumn Budget Expectations Weighed on GBP AUD Exchange Rate
The GBP AUD exchange rate was given a further boost on Thursday by a surprising strong surge in UK retail sales. Consumer confidence appeared to remain buoyant in October, with sales rising 7.6% in spite of persistent worries clouding the global economic outlook. This encouraged greater optimism in the resilience of the UK economy, prompting investors to pile back into the Pound.
Even so, market sentiment towards Sterling remained rather jittery in anticipation of Chancellor Philip Hammond’s first Autumn Statement. Although the aftermath of the Brexit vote had prompted expectations of greater fiscal stimulus and a rolling back of George Osborne’s austerity measures it looks increasingly likely that this will not be the case. While tax cuts could encourage greater investor confidence a lack of stimulus is likely to lead to disappointment, exerting extra downside pressure on the GBP AUD exchange rate.
High Odds of 2016 Fed Rate Hike Forecast to Limit Australian Dollar Appeal
Third quarter Australian construction data could offer greater support to the Australian Dollar in the near future, providing that the domestic economy demonstrates further signs of resilience. Following the sharp decline seen in the second quarter any particular rebound in productivity could boost confidence in the ‘Aussie’.
Even so, the primary influence on the antipodean currency in the coming week is likely to be wider market risk sentiment and the relative strength of the US Dollar. Should the latest Fed meeting minutes increase the belief in a December rate hike then the GBP AUD exchange rate is likely to make fresh gains. However, if base metal prices continue to rally on the prospect of greater US infrastructure investment then the ‘Aussie’ could stand to trend higher.
Ahead of the weekend the second estimate of the third quarter UK GDP report could provoke additional Pound volatility. Should growth be confirmed to have strengthened in the wake of the Brexit vote then Sterling is likely to experience a fresh boost, seeming to confirm that the impact of the referendum has been more limited. Nevertheless, any downside surprise could see the GBP AUD exchange rate come under renewed pressure.