Pound Sterling to Australian Dollar (GBP/AUD) Exchange Rate Shrugs off Dip in UK Inflation

Weaker UK Inflation Fails to Dent GBP/AUD Exchange Rate

UPDATE: The Pound Sterling to Australian Dollar (GBP/AUD) exchange rate pushed higher this morning even after the UK consumer price index showed an easing in inflation on the year.

Although inflation is no longer trending above the Bank of England’s (BoE) 2% target the mood towards Pound Sterling (GBP) remained positive.

With UK average earnings continuing to comfortably outpace inflation the odds of stronger consumer spending picked up, encouraging hopes of a more resilient second quarter economic performance.

Higher Odds of RBA Interest Rate Cut Shore up Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate

As the Reserve Bank of Australia’s (RBA) June meeting minutes pointed towards a further easing in monetary policy the Australian Dollar (AUD) came under renewed pressure.

The minutes noted that further policy action will ‘more likely than not’ be appropriate in the months ahead, pushing AUD exchange rates lower as markets moved to price in another potential 2019 interest rate cut.

Although policymakers did also acknowledge that interest rates are not the only policy means by which they can tackle high levels of unemployment this was not enough to diminish the impact of this dovish commentary.

Coupled with weaker-than-expected first quarter Australian house price index figures this helped to keep the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate on a steady foot this morning.

Worries Over Potential No-Deal Brexit Continue to Drag on Pound Sterling (GBP)

The heightened risk of a no-deal Brexit, driven by the odds of Boris Johnson winning the Conservative leadership contest, continued to limit the appeal of Pound Sterling (GBP), however.

With Johnson still appearing on course to secure a sizeable majority of the votes in the second round of the leadership race investors lacked significant incentive to favour the Pound.

As political developments continue to unfold this looks set to provoke further volatility for GBP exchange rates, especially if the odds of the UK leaving the EU without a deal see any decline.

Fresh evidence of economic weakness could also weigh heavily on the GBP/AUD exchange rate in the coming days as markets assess the ongoing impact of political uncertainty.

Easing UK Inflation Set to Limit GBP/AUD Exchange Rate Upside

GBP exchange rates may come under greater pressure on the back of tomorrow’s UK consumer price index report.

Forecasts point towards the headline annual inflation rate easing from 2.1% to 2.0% in May, with a similar decline in the monthly measure.

Any softening here could encourage the Bank of England (BoE) to leave interest rates on hold for longer as inflation falls back in line with the central bank’s 2% target.

While weaker levels of inflation would prompt stronger wage growth this could still weigh heavily on the Pound, with markets wanting to see interest rates rise again sooner rather than later.

Australian Dollar (AUD) Vulnerable to Further Signs of RBA Dovishness

Comments from RBA Governor Philip Lowe could add to the bearish mood of AUD exchange rates on Thursday, meanwhile.

As long as Lowe reiterates the likelihood of monetary policy loosening in the near future the Australian Dollar looks set to shed further ground against its rivals.

Friday’s set of Australian manufacturing and services PMIs may offer some encouragement to investors, though, as forecasts point towards a slight improvement in growth on the month.

Evidence of greater resilience within the Australian economy could put the GBP/AUD exchange rate on the back foot, as the impact of recent global trade tensions eases.

Louisa Heath

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