Surprise Australian Inflation Boost Drives GBP/AUD Exchange Rate Back Towards Multi-Month Low

Australian Inflation Uptick Pushes Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Down

As the Australian consumer price index strengthened further than forecast in the second quarter this left the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate under pressure.

Bettering expectations, the headline Australian inflation rate jumped from 1.3% to 1.6% on the year, offering the Australian Dollar (AUD) a solid rallying point.

Investors also took encouragement from a sharp improvement in the quarterly inflation rate, which surged from 0.0% to 0.6% in the second quarter.

All in all, this suggests that inflationary pressure within the Australian economy is improving more rapidly than anticipated, giving the Reserve Bank of Australia (RBA) less incentive to cut interest rates.

While global trade tensions remained heightened thanks to the ongoing US-China trade talks this was not enough to weigh down AUD exchange rates this morning.

Rising Consumer Confidence Offers Limited Support to Pound Sterling (GBP)

An improvement in July’s UK GfK consumer confidence index failed to offer Pound Sterling (GBP) any particular boost, meanwhile.

Although the index unexpectedly picked up from -13 to -11 the impact of the data was limited, thanks to the fact that the survey occurred before the change in government.

With Boris Johnson and his cabinet continuing to fuel bets that the UK will crash out of the EU without a deal in October the mood of GBP exchange rates remained bearish.

As the issue of the Irish border remains a key sticking point the GBP/AUD exchange rate could struggle to recover any of its lost ground in the near future, barring any positive signs of progress towards a resolution.

GBP/AUD Exchange Rate Vulnerable to Increasing BoE Dovishness

Fresh volatility is forecast for the Pound tomorrow thanks to the latest Bank of England (BoE) policy decision and announcement.

While policymakers are expected to leave interest rates on hold for the time being markets are wary of a potential shift towards greater dovishness.

With the risk of a no-deal Brexit increasing the BoE could move towards a more cautious outlook, further diminishing the likelihood of interest rates rising before the end of the year.

The contents of the quarterly Inflation Report may also put pressure on the GBP/AUD exchange rate, as Brexit uncertainty drives up price pressures in spite of lacklustre economic growth.

However, if the BoE appears less inclined to loosen monetary policy in spite of the current atmosphere of political anxiety this could help to limit the downside potential of the Pound.

Slowing Manufacturing Sector Set to Weigh on Australian Dollar

Worries over the health of the Australian economy could increase on Wednesday, meanwhile, as forecasts point towards another weak manufacturing PMI.

If the index remains below the neutral baseline of 50, continuing to sit in contraction territory, this could further undermine confidence in the economic outlook.

A slowing manufacturing sector could easily drag on economic growth in the third quarter, giving the RBA cause to consider looser monetary policy.

On the other hand, a rebound in manufacturing sector activity may offer a boost to the Australian Dollar, keeping the GBP/AUD exchange rate trending in the region of its recent lows.

Louisa Heath

Contact Louisa Heath