Pound to Australian Dollar Forecast: Stronger Aussie Inflation to Provoke AUD Exchange Rate Rally

Update: GBP/AUD Exchange Rate Recovers Ground as US Bond Yields Rise

In spite of a softer start to the week the Pound to Australian Dollar (GBP/AUD) exchange rate started to recover some momentum over the course of Monday’s European session.

This was largely due to the relative weakness of the Australian Dollar (AUD), which went into reverse as US bond yields climbed higher.

With the appeal of the commodity-correlated AUD limited thanks to the bullish US outlook the GBP/AUD exchange rate found some renewed degree of support.

Pound Australian Dollar (GBP/AUD) Exchange Rate Turns Sluggish on Dovish BoE Outlook

Unexpectedly dovish commentary from Bank of England (BoE) Governor Mark Carney saw the Pound to Australian Dollar (GBP/AUD) exchange rate weaken dramatically last week.

Investors were caught off-guard as Carney opted to talk down the prospect of a May interest rate hike, suggesting that policymakers could leave monetary policy on hold until a later meeting.

As an imminent rate hike had already been effectively priced into Pound (GBP) exchange rates, with odds of almost 90%, this naturally left Sterling on the back foot.

While the Pound was able to recover some of its lost ground over the following days its strength remains limited, particularly as Brexit-based jitters started to intensify once again.

Underwhelming Australian Jobs Data Limited GBP/AUD Exchange Rate Weakness

The losses of the Pound to Australian Dollar (GBP/AUD) exchange rate were also limited as a result of Thursday’s weaker-than-expected Australian labour market data.

Confidence in the Australian Dollar (AUD) diminished sharply thanks to a surprise deterioration in March’s participation rate, which showed that a smaller number of Australians are now economically active.

This weaker showing undermined confidence in the underlying health of the Australian economy, even though the first quarter NAB business confidence survey proved more upbeat in nature.

While base metal prices saw some major gains ahead of the weekend, driven by the prospect of fresh US sanctions against Russia, this was not enough to reverse the weakness of AUD exchange rates.

Rising Australian Inflation Forecast to Dent Pound Australian Dollar (GBP/AUD) Exchange Rate

Further weakness could be in store for the Pound to Australian Dollar (GBP/AUD) exchange rate on the back of the first quarter Australian consumer price index data.

Forecasts point towards a slight uptick from 1.9% to 2.0% in the headline consumer price index on the year, putting the measure in line with the Reserve Bank of Australia’s (RBA) inflation target.

Stronger inflation is likely to boost Australian Dollar (AUD) exchange rates, giving RBA policymakers greater cause for confidence in the domestic outlook.

Even so, an improvement in the first quarter CPI is unlikely to be enough to materially alter the current policy outlook of the central bank, limiting the positive impact on the Australian Dollar.

Any downside surprise, meanwhile, could weigh heavily on demand for the antipodean currency, giving the GBP/AUD exchange rate a fresh boost on Tuesday.

GBP/AUD Exchange Rate Forecast: Pairing Vulnerable to Volatility Ahead of First Quarter UK GDP Data

The Pound to Australian Dollar (GBP/AUD) exchange rate may see some volatility in response to the latest first quarter UK gross domestic product data.

If the updated figures suggest that the economy lost further momentum in the first three months of 2018 the mood towards the Pound (GBP) is likely to sour once again.

Weaker growth would give the BoE further incentive to leave interest rates on hold at its May policy meeting, adding to doubts over the resilience of the UK economy.

Developments surrounding Brexit are also expected to impact GBP exchange rates in the coming days, with UK and EU officials looking no closer to resolving the Irish border issue.

Unless there is evidence that the UK government is willing to concede to remaining within the customs union the Pound to Australian Dollar exchange rate will remain vulnerable to further softness.

Hannah Wilson

Contact Hannah Wilson