Pound Australian Dollar (GBP/AUD) Exchange Rate Upside Limited as UK Inflation Hits Three-Year Low

Weaker UK Inflation Limits Pound Australian Dollar (GBP/AUD) Exchange Rate Support

As the UK consumer price index fell short of forecast in October the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate struggled to hold onto a positive footing.

With the headline inflation rate easing from 1.7% to 1.5%, hitting a three-year low, the odds of a Bank of England (BoE) interest rate cut appeared to pick up further, leaving Pound Sterling (GBP) under renewed pressure.

The monthly consumer price index also gave investors cause for concern, showing a -0.2% contraction as domestic price pressures weakened.

All in all, with inflation looking set to remain below the BoE’s 2% target in the coming months the risk of a greater shift towards dovishness has increased as confidence in the economic outlook continued to weaken.

Softening Wage Index Weighs on Australian Dollar (AUD) Demand

The mood towards the Australian Dollar (AUD), meanwhile, deteriorated in response to a surprise weakening of the third quarter wage price index.

As the headline index eased from 2.3% to 2.2% this stoked fresh anxiety over the underlying health of the Australian economy, putting a dampener on AUD exchange rates.

Lingering worries over the global trade outlook also kept the risk-sensitive currency under pressure this morning, following the Trump administration’s latest tariff threat.

With a phase one US-China trade deal looking increasingly unlikely to materialise in the near term the Australian Dollar fell further out of favour.

AUD Exchange Rates Vulnerable to Rising Unemployment Rate

Further weakness could be in store for AUD exchange rates tomorrow if October’s labour market data fails to impress.

Investors anticipate an uptick in the unemployment rate from 5.2% to 5.3%, driven by a decline in part-time employment.

Signs of a loosening labour market could encourage the Reserve Bank of Australia (RBA) to adopt a more dovish outlook in the months ahead, raising the odds of fresh policy action.

Given the RBA’s existing concerns over domestic employment and wage growth any disappointment here is likely to weigh heavily on AUD exchange rates.

Resilient UK Retail Sales Forecast to Boost GBP/AUD Exchange Rate

The GBP/AUD exchange rate may also find a rallying point on the back of the latest UK retail sales data, with forecasts pointing towards a fresh uptick in consumer spending.

If sales excluding auto fuel strengthen 3.4% on the year as anticipated this could offer the Pound a fresh leg up against its rivals.

Evidence that UK consumers are largely shrugging off political anxiety and the ongoing Brexit-based uncertainty may encourage a greater sense of confidence in the economic outlook.

Although the monthly sales figure is not expected to show quite such a solid improvement anything short of a contraction in spending looks set to give GBP exchange rates a boost on Thursday.

However, if consumer spending falters this could spark renewed anxiety over the underlying resilience of the UK economy, to the detriment of the Pound.

Louisa Heath

Contact Louisa Heath