Pound Australian Dollar (GBP/AUD) Exchange Rate Strengthens amid Risk-Off Mood

Pound Australian Dollar (GBP/AUD) Exchange Rate Gains Ground as Risk Aversion Worsens

(Updated 15:30, 24/1/22) The Pound Australian Dollar (GBP/AUD) exchange rate firmed to a six-day high this afternoon as the Ukraine crisis intensified. This added to the anxious mood gripping markets, which weighed on the risk-sensitive ‘Aussie’.

Earlier today, Nato reinforced its eastern borders as a Russian invasion of Ukraine looks increasingly likely.

Jens Stoltenberg, Nato’s Secretary General, cited the ‘deteriorating security situation’ for the move. Stoltenberg added:

‘Nato will continue to take all necessary measures to protect and defend all allies, including by reinforcing the eastern part of the alliance. We will always respond to any deterioration of our security environment, including through strengthening our collective defence.’

As a result, European equity markets are continuing their selloff.

Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown, commented:

‘The threat of conflict breaking out on the doorstep is hanging over European indices, as hopes begin to fade that there will be fresh meaningful moves from diplomats.’

Expectations that the Federal Reserve will soon raise interest rates are also denting risk appetite. The US central bank will meet on Wednesday, when it’s likely to signal that its first rate hike will come in March.

Raffi Boyadjian, Lead Investment Analyst at XM, warns that the bearish market mood could persist:

‘Wall Street just had its most bruising week since the onset of the pandemic in March 2020 and it could get even rockier for stocks in the coming days. The Federal Reserve is poised to give a formal nod to liftoff on Wednesday and the earnings season is about to heat up with a host of major names set to report this week.

‘Meanwhile, tensions between the West and Russia over Ukraine show no sign of easing, adding to the market angst as a conflict could potentially deepen the global energy crisis.’

GBP/AUD is currently trading at AUD$1.8959, up 0.5% from its overnight low.

Original article continues below:

Pound Australian Dollar (GBP/AUD) Exchange Rate Trades Sideways as PMIs Disappoint

The Pound Australian Dollar (GBP/AUD) exchange rate is wavering today as poor data and a bearish market mood weigh on the risk-sensitive ‘Aussie’.

However, Sterling may find its upside capped. According to the UK’s flash composite PMI, private sector growth has slowed to an 11-month low.

Australian Dollar (AUD) Dips on Dire PMIs

The Australian Dollar (AUD) took a hit overnight after Australia’s latest flash Markit PMI estimates massively missed forecasts.

In January, manufacturing activity slowed from 57.7 to 55.3 – lower than the score of 57 that economists had expected.

Service-sector activity was far worse. The consensus forecast was that the services PMI would show a modest drop from 55.1 to 54.8. Instead it slumped to 45, plunging past the 50-point mark that separates growth from contraction.

The score indicates the first month of contraction in Australia’s services sector since September. Rising Covid cases hit both service demand and activity, while employment also fell.

Jingyi Pan, Economics Associate Director at IHS Markit, commented:

‘The Australian economy had slipped from a state of strong recovery in end-2021 to being affected by the surge in COVID-19 infections at the start of 2022 according to the IHS Markit Flash Australia Composite PMI.’

The Australian Dollar dropped in response overnight and is currently wavering as a cautious trading sentiment keeps it subdued. Poor economic data, the Ukraine-Russia crisis and looming interest rate rises are all hanging over markets today, which is weighing heavily on the risk-sensitive ‘Aussie’.

Pound (GBP) Pressured as Private Sector Growth Slows

Meanwhile, the Pound may struggle to make further gains today following the UK’s own flash PMI figures.

Manufacturing and service-sector activity were expected to hold steady and expand, respectively. Instead they both edged lower. Overall, UK private-sector growth slowed to an 11-month low.

The slowdown was mainly due to the spread of the Omicron variant. Hospitality, leisure and travel took a big hit amid the UK’s Plan B restrictions and caution among consumers. Staff illness and isolations also weighed on business activity, along with a drop in consumer spending as many people opted to stay at home to avoid infection.

The report wasn’t all bad, however. Many areas of the private sector have been far less affected by the spread of Omicron, indicating resilience in the UK’s economic recovery.

Chris Williamson, Chief Business Economist at IHS Markit, said:

‘A resilient rate of economic growth in the UK during January masks wide variations across different sectors. Consumer-facing businesses have been hit hard by Omicron and manufactures have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust.’

GBP/AUD Exchange Rate Forecast: Aussie to Remain Subdued amid Risk-Off Mood?

Looking ahead, GBP/AUD may continue to waver today. It could even edge higher if the market mood remains cautious. While risk sentiment can turn around quite quickly, the factors affecting it today are unlikely to be resolved during the forex session.

Overnight we have Australia’s latest CPI data. Economists expect inflation to have increased last quarter, which could boost AUD.

Australia’s NAB business confidence index for last month is also due out. Could rising Covid cases have triggered a sharper-than-expected drop in business morale?

As for the Pound, tomorrow’s reports from the Confederation of British Industry could cause some movement.

GBP investors will also be waiting for the conclusion of Sue Gray’s inquiry into parties at Number 10 Downing Street. If Boris Johnson faces renewed calls to resign then Sterling could stumble.

Samuel Birnie

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