Pound Sterling to Australian Dollar Exchange Rate Climbs as Disappointing AU Inflation Data Curbs Hike Expectations

Slower than Expected AU Consumer Price Growth Pushes Pound Sterling to Australian Dollar (GBP/AUD) Exchange Rate Higher

Although GBP is struggling elsewhere, the Pound Sterling to Australian Dollar exchange rate has been pushed higher today by early morning Antipodean inflation data.

The Australian Dollar has been unable to capitalise on strong market risk appetite, even though the US Dollar is on the decline ahead of today’s Federal Open Market Committee (FOMC) monetary policy decision announcement.

The Pound has received little support from a surprisingly upbeat UK consumer confidence reading, with the index from GfK showing an unexpected climb from -13 to -9.

While households reported having more confidence in their financial prospects for the coming year, GfK Head of Market Dynamics Joe Staton cautioned ‘in the absence of good news about rising wages and declining inflationary pressures, this off-trend number could be a temporary blip rather than a strong sign of recovery.’

Additionally, markets were unsettled by news from private outsourcing firm Capita, after new Chief Executive Jonathan Lewis issued a concerning profit warning and a brutal assessment of the current state of the company.

Capita is similar to the now-collapsed Carillion in that it operates numerous outsourced government services as well as communication schemes for the Pensions Regulator, electronic monitoring for the Ministry of Justice and customer enquiries the Department of Work and Pensions.

Markets are now fearing the collapse of another giant in the UK outsourcing sector and the cost to taxpayers that could follow.

Gains for Pound Sterling to Australian Dollar Exchange Rate as RBA Policy Outlook Dampened by Inflation Softness

Disappointing Australian consumer price index figures this morning have allowed the GBP/AUD exchange rate to register solid gains.

Fourth-quarter data showed that inflation remained at 0.6% quarter-on-quarter, instead of accelerating to 0.7% as forecast, while year-on-year price growth only rose from 1.8% to 1.9% instead of to 2%.

Su-Lin Ong of RBC Capital Markets explained:

‘Patience is still the most prudent option especially given a number of other headwinds including a softening housing market, cautious and indebted households and stronger currency. Accordingly, we expect the RBA to remain on the sidelines in what is likely to become an unusually long period of steady cash at 1.50%.’

While this appears to be the consensus view amongst economists, not everyone is convinced that today’s inflation disappointment will put the brakes on any plans from the Reserve Bank of Australia (RBA) to hike interest rates this year.

Joanne Masters of ANZ Bank said:

‘The Q4 inflation print was a touch below expectations for headline, but in line with our expectations for core. Overall, it was a solid result, particularly given the drag from the re-weighting.’

‘Overall the data suggests that inflationary pressures have stabilised just below the policy band and should rise gradually over time. We see this data as consistent with our view that the RBA will look to raise rates this year, with a focus on bringing the real cash rate back to zero.’

High-impact data from other nations could cause volatility in the Pound Sterling to Australian Dollar exchange rate today, given that AUD will respond sharply to changes in market risk appetite.

The weak inflation data has already ensured that the ‘Aussie’ is not the risk asset of choice today, but if this afternoon’s Canadian GDP figures were to disappoint then some investors in the market may turn away from the Canadian Dollar and towards the Australian Dollar.

There are also two key developments on the US data calendar that could significantly impact market demand for the safe haven US Dollar and therefore the Australian Dollar.

The first of these is the ADP employment change figure for January, which is viewed as a bellwether for the much more influential non-farm payrolls figure that always follows two days later.

After the close of the London session the Federal Open Market Committee (FOMC) will announce its latest monetary policy decisions and the Australian Dollar could slump if the Fed seems intent on raising interest rates in March. Caution over the US monetary policy outlook, however, would push the GBP/AUD exchange rate significantly lower.

Should the day’s high-profile overseas developments prove uninteresting, the AiG Performance of Manufacturing Index for January will be released late tonight, which may create some overnight volatility for GBP/AUD.

The precarious financial situation of UK outsourcing firm Capita continues to weigh on the Pound today, with shares having plunged over 40%, sparking fears that the business could go the same way as Carillion, which would impact government finances and the wider UK economy.

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard