UK Inflation Dip Drags Pound Australian Dollar (GBP/AUD) Exchange Rate Lower
As the headline UK inflation rate proved weaker than forecast the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate came under further pressure.
News that the consumer price index had eased from 1.5% to 0.8% on the year in April fuelled fresh speculation over the possibility of a Bank of England (BoE) interest rate cut.
With policymakers already reportedly assessing the possibility of negative interest rates the odds of a fresh monetary loosening move picked up sharply, leaving Pound Sterling (GBP) on the back foot.
As long as the BoE looks set to maintain a dovish bias in the months ahead GBP exchange rates could struggle to recover from their current slump.
Given the uncertainty still surrounding the issue of Brexit the potential for further economic disruption remains, increasing the risk of an extended deterioration in growth and the justification for additional BoE action.
Australian Dollar Gains Ground as Westpac Leading Index Betters Forecast
The mood towards the Australian Dollar (AUD) saw some improvement, meanwhile, as April’s Westpac leading index showed a smaller contraction on the month that forecast.
Although the index still slumped -1.5% at the start of the second quarter investors were still encouraged to take a more positive view in the wake of the data.
While tensions between China and the US showed fresh signs of flaring up this was not enough to prompt any significant turnaround in market sentiment, on the other hand.
With markets still optimistic that an end to the current lockdown could be in sight the downside potential of AUD exchange rates proved limited.
Soft UK PMIs Forecast to Limit GBP/AUD Exchange Rate Support
Demand for the Pound could weaken further tomorrow unless May‘s initial set of UK PMIs deliver a solid improvement on the month.
Evidence that economic activity in both the manufacturing and services sectors started to recover in the last month may offer the GBP/AUD exchange rate a rallying point.
Even so, forecasts still point towards the PMIs remaining deep in contraction territory as the impact of the Covid-19 crisis weighs on the UK economy.
Another underwhelming showing here would increase the odds of a sharper decline in the second quarter gross domestic product, raising the risk of an even deeper incoming recession.
Without signs of resilience within the UK economy the Pound looks vulnerable to a sustained run of losses.
AUD Exchange Rates Vulnerable to Underwhelming Australian PMIs
Confidence in the underlying health of the Australian economy could deteriorate if the latest set of manufacturing and services PMIs fail to impress.
Another lacklustre month of activity would limit the odds of the economy bouncing back in the near future, giving investors less incentive to favour the antipodean currency.
Any weakening in the general sense of market risk appetite could also see AUD exchange rates falter this week, with worries over the global trade outlook lingering.
Signs of increased dovishness from the Federal Reserve may still offer the Australian Dollar a fresh boost, though.