GBP/AUD Exchange Rate Climbs Over 1% as Strong US Inflation Data Hammers Australian Dollar

GBP/AUD Exchange Rate Climbs Over 2 Cents after Unexpected Rise in US Core Inflation Dampens Risk Appetite

The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate surged this morning, clocking in gains of around 1.1% as markets turned to GBP in the absence of a strong USD.

This is despite a complete lack of fresh UK ecostats today, although a suggestion from Nigel Farage that a second Brexit referendum might be necessary has interested traders.

As Alvin Tan, a Societe Generale FX Strategist, explains: ‘Sterling is benefiting from the [US] Dollar weakness and the growing Euro strength rather than any Pound-specific factors which if anything have been underwhelming this week.’

Earlier this week the GBP/AUD exchange rate was trending around a nine-and-a-half-week low of 1.71.

US Dollar weakness, coupled with a pause in UK data and Brexit-related updates, incentivised investors to boost Pound Sterling up from its lows; especially as the Australian Dollar was also on hold until after this afternoon’s key US figures were released.

Forecast Beating US Ecostats Heighten Pound Sterling Gains versus Australian Dollar

With the release of the anticipated US inflation data the Pound Sterling to Australian Dollar exchange rate has climbed even higher, after US core inflation showed a surprise uptick year-on-year.

Month-on-month, consumer prices minus the impact of volatile food and fuel prices rose 0.3%, beating forecasts of a smaller uptick from 0.1% to 0.2%.

This puts year-on-year core inflation at 1.8%, against bets of a hold at 1.7%, meaning price growth is just 20 basis points below the Federal Reserve’s target level.

This has increased the likelihood the Federal Open Market Committee (FOMC) will vote to raise interest rates again in the near-term.

According to the Fed Funds futures market, there are no expectations of monetary tightening at this month’s meeting, scheduled for 31st January, but there is a 67.1% chance of interest rates being hiked to 1.75% on 21st March when the FOMC meets for the second time this year.

Australian Dollar Weakened as Odds of Near-Term US Monetary Tightening Climb Following Inflation Data Uptick

With the odds of further monetary tightening in the US in the near-term climbing sharply, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate has raced higher.

Markets are selling out of the commodity-correlated Australian Dollar on fears that another imminent round of policy tightening from the US will hammer the currency lower.

Investors were also disappointed by the latest Chinese trade data. Imports accelerated unexpectedly in Yuan terms, and when not priced in the local currency, it seems companies slammed the brakes on their imports during December.

The rate of imports collapsed from 17.7% to 4.5% year-on-year, drastically undershooting forecasts for a slowdown to 14.8%.

As well as factories slowing down for the winter season, there are also fears that iron ore imports have fallen as Chinese manufacturers’ inventories reach full capacity.

GBP/AUD Exchange Rate Forecast: Will Australian Inflation Estimate Help Australian Dollar to Recover Next Week?

Monday’s release of the TD Securities inflation estimate for December could help create some appetite for the Australian Dollar.

The GBP/AUD exchange rate may already face pressure as the Australian Dollar rebounds following the huge losses recorded today. Any rebound will be facilitated by reports indicating solid domestic data.

The TD Securities estimate uses the same modelling methods as the Treasury to calculate monthly inflation readings – official data is only released quarterly – giving traders a more timely insight into the pace of consumer price growth.

Looking ahead, there is no UK data set for release on Monday, although markets may be interested in an after-session speech by Bank of England (BoE) economist Silvana Tenreyro, who will be speaking at a productivity event in London.

Sluggish productivity growth has long been a scourge for the UK economy, but if Tenreyro were to offer cause for optimism this could lift Pound Sterling when trading begins again on Tuesday.

Late-night ANZ Roy Morgan weekly consumer confidence data could see the GBP/AUD exchange rate fluctuating in overnight trading, although in itself the data may not be impactful enough to cause significant movement for the Australian Dollar.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons