Pound Australian Dollar Stable as BoE Warns of Rising Inflation

GBP/AUD Exchange Rate Stabilises Near Week’s Opening Levels

(Updated 16:35 8/10/21) The Pound Australian Dollar (GBP/AUD) exchange rate ticked higher at the end of the week to recover near the pairings start of the week levels.

Following comments on rising inflation from the Bank of England’s (BoE) chief economist Hugh Pill, the Bank’s financial policy committee also warned of the potentially damaging consequences of soaring inflation on the UK economy.

The BoE said rising inflation threatens to trigger a global equity market selloff that would harm the UK economy.

As energy prices soar, supply chain problems intensify, and shortages of staff and materials mount, the economic recovery from the pandemic is slowing.

Alongside record highs of riskier assets in a number of markets, rapid inflation could cause a rapid selloff of the assets.

The financial policy committee said:

“Asset valuations could correct sharply if, for example, market participants re-evaluate the prospects for growth, inflation or interest rates.”

Original article continues below:

Pound Australian Dollar (GBP/AUD) Recovers Losses on Easing Energy Crisis and BoE

The Pound Australian Dollar (GBP/AUD) exchange rate is edging higher on Friday, modestly recovering some of its losses after slipping through midweek trade.

The Pound (GBP) is receiving support from hopes that the UK’s energy price crisis will stabilise and comments from Bank of England (BoE) chief economist Huw Pill.

Meanwhile, the Australian Dollar (AUD) is under pressure from a risk-off market mood that is denting demand for the risk-sensitive ‘Aussie’, leaving GBP/AUD up approximately 0.2% this morning to trade at 1.8649.

Pound (GBP) Supported by BoE Comments

The Pound is limited this morning amid a cautious market mood, but is holding some of yesterday’s gains and is recovering some losses against the more risk-sensitive Australian Dollar.

GBP exchange rates received support from gas prices falling back slightly from record highs yesterday after Russian President Vladimir Putin hinted the country may increase supplies to Europe.

The news momentarily appeared to ease fears of industry shutdowns and possible blackouts in the UK over winter.

Comments from new BoE chief economist Huw Pill have also provided underlying support for Sterling.

Huw Pill struck a hawkish tone in comments to the UK Parliament’s Treasury Committee that some analysts believe suggested an interest rate hike may be likely sooner than expected.

The chief economist said concerns about inflation are increasing, commenting:

“As the pandemic recedes and the level and composition of global demand and supply normalise, these inflationary pressures should subside. But the magnitude and duration of the transient inflation spike is proving greater than expected.

“Over recent months inflation has surprised to the upside, UK activity data have disappointed somewhat, while the labour market has tightened. This combination has all the hallmarks of an adverse supply shock, centred on mismatches in the labour market.

“Supply problems within the UK owe to the ‘pingdemic’ and shortages of specific skills (such as HGV drivers). Moreover, the rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4% into 2022 Q2.”

With increasing concerns that rising inflationary pressure could lead to tighter monetary policy from the BoE, the Pound received support.

Australian Dollar (AUD) Dented by Risk-Off Mood

The Australian Dollar is weakening at the end of the week amid risk-off trade.

Downbeat market sentiment driven by the threat of an energy crisis, global supply chain problems, and widespread inflation concerns, is weighing on AUD exchange rates.

Investors are also in a cautious mood ahead of the highly influential US non payrolls which could provide the decisive data for the Federal Reserve to tighten its monetary policy and plan for interest rate hikes, influencing global markets.

The risk-off mood offset better-than-expected Chinese services PMI data for September after the sector jumped back to growth with a 53.4 reading, up from August’s 46.7 contraction.

AUD investors appear to have shrugged off the upbeat data despite the Australian Dollar usually acting as a proxy to the Chinese economy.

Meanwhile, the Reserve Bank of Australia’s (RBA) Financial Stability Review failed to drive significant movement in the Australian Dollar despite the central bank noting that ‘expected output will rebound as the economy gradually reopens.’

GBP/AUD Forecast: ‘Aussie’ Sensitive to Risk Appetite

The Pound Australian Dollar exchange rate looks set for more volatility as market mood is driven by developments in the looming energy price crisis, global supply chains, and global inflation jitters.

UK employment data at the start of the next week will likely drive movement in the Pound.

With the UK unemployment rate set to decline from 4.6% to 4.5% in August, and recent reports suggesting the low-impact of furlough ending last month, Sterling may find support on improving jobs market data.

Meanwhile, the risk-sensitive Australian Dollar could come under pressure if market sentiment sours, while the NAB business confidence index is forecast to have dipped again in September.