GBP/AUD Exchange Rate Subdued as Investors’ Focus Turns to Wage Squeeze, Stagflation
(Updated 16:00, 28/10/2021) The Pound Australian Dollar (GBP/AUD) exchange rate is trading lower this afternoon as GBP sentiment sours with fresh analysis of Rishi Sunak’s autumn budget.
While the initial focus was on lower government debt, firmer growth and lower unemployment, as well as well-needed cash injections across healthcare and education, experts are now calculating the effects of lower wages combined with ongoing inflation.
According to the Institute for Fiscal Studies (IFS), an unprecedented two-decade hit to earnings would leave average household disposable income 42% lower than it would have been had wages grown at pre-2008 financial crisis rates: average household earnings would be £30,800, compared with £43,700.
The chancellor moved to partly reverse cuts to universal credit yesterday, in response to mounting concerns over the squeeze on low-income workers this winter. Despite this, analysts warn that voter sentiment will likely be subdued going forwards, as the cost of living is set to increase alongside other tax payments, resulting in a lower standard of living.
Original article continues below:
Pound Australian Dollar Exchange Rate Trades Level; Investors Hope for Early Rate Hikes
The Pound Australian Dollar (GBP/AUD) exchange rate is directionless this morning as a lack of significant data leaves both currencies to trade on external factors. Rising bets for an early rate hike from the Reserve Bank of Australia (RBA) support the Australian Dollar (AUD), while an improved UK growth forecast caps losses for GBP.
At the time of writing, GBP/AUD is trading at A$1.8307, virtually unchanged from today’s opening levels.
Pound (GBP) Firms as Investors Digest Autumn Budget
The Pound (GBP) is trading up this morning as a risk-on mood supports Sterling; investors are optimistic in the wake of yesterday’s autumn budget reveal.
In the opinion of economists at Westpac, the ‘UK’s Autumn Budget proved to be more generous than expected… the Office of Budget Responsibility (OBR) forecasts lower Govt. debt and issuance due to firmer growth, lower unemployment and much improved Govt. revenue.’
In yesterday’s address, Rishi Sunak chose to allocate the majority of funds almost immediately – £25bn in 2022-23 to go to schools, ‘family hubs’, transport infrastructure and a variety of other causes. The Chancellor of the Exchequer also reversed universal credit cuts.
Forecasts of 6.5% growth in GDP this year have buoyed spirits in particular; up from the 4% rate forecast at the last budget in March.
Off the back of these announcements, a handful of investors remain hopeful that the Bank of England (BoE) may be persuaded to hike its interest rate earlier than initially planned.
According to Reuters, investors are pricing in a rate hike by the BoE on 4 November: although most economists think the BoE will wait until early 2022 before moving.
Australian Dollar (AUD) Climbs on Rate Hike Optimism
The Australian Dollar finds support today on hopes of an early rate hike from the RBA. Yesterday’s trimmed mean inflation for the third quarter encouraged such expectations, with signs that consumer cost pressures are becoming entrenched.
While the annual inflation rate in Australia fell to 3% from a 12-and-a-half year high of 3.8%, quarterly consumer prices went up by 0.8% as construction costs and higher fuel prices drove inflation. The RBA Trimmed Mean CPI rose 2.1% year-on-year in the third quarter, the most since 2015.
This put the figure back within the RBA’s 2% to 3% target range for the first time in six years: the central bank had forecast core inflation would not reach 2% until mid-2023 and subsequently, that cash rates would remain at record lows of 0.1% until 2024.
Markets had already judged that the RBA was behind the curve on inflation and may have to tighten earlier than expected: according to Ben Udy at Capital Economics:
‘The strong rise in underlying inflation will keep pressure on the RBA to keep reducing monetary stimulus in the months ahead.’
Governor Philip Lowe has repeatedly argued that inflation in Australia has a lot of inertia as low wage growth persists – however, risks remain tilted to the upside, as petrol prices climb and the media is full of warnings about stagflation amid global supply bottlenecks.
GBP/AUD Exchange Rate Forecast: Australian Retail Sales to Direct Movement?
Looking ahead, Australia’s retail sales preliminary tomorrow morning may influence the Pound Australian Dollar exchange rate, as sales are expected to have fallen by less than in August.
Meanwhile, the BoE’s consumer credit figure for September may also influence trading, as an expected increase in borrowing indicates increased spending and an expanding economy.