Pound Australian Dollar Exchange Rate Strengthens as Fed Rattles Markets

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

The Pound Australian Dollar (GBP/AUD) exchange rate received a boost overnight after the Federal Reserve soured market mood by striking a more hawkish than expected tone.

Risk-off trade continues to weigh on the risk-sensitive ‘Aussie’ this morning, while the Pound is lacking direction amid UK political uncertainty and post-Brexit trade talks concerns between the UK and EU.

GBP/AUD is edging higher at AU$1.8942 on Thursday morning, holding the gains the pairing made overnight.

Pound (GBP) Struggles as Downing Street Report Looms

While making gains against its more risk-sensitive peers, the Pound (GBP) is struggling for support on Thursday as the furore over Downing Street parties persists.

The report into potential breaches of lockdown rules from senior civil servant Sue Gray looms after many had expected the government to receive the document yesterday.

Amid increasing calls for Prime Minister Boris Johnson to resign, speculation is growing that Conservative MPs may force a vote of no confidence to trigger a leadership contest.

The lingering political uncertainty surrounding the Prime Minister’s future has led to some caution among GBP investors.

Meanwhile, UK-EU talks on the Northern Ireland Protocol also continue to weigh on GBP sentiment due to a lack of progress and threat of disruption to trade and economic activity.

Comments from Boris Johnson may sour relations with the EU, after he accused them of implementing the Northern Ireland Protocol in ‘an insane and pettifogging’ way.

As pressure grows for signs of an agreement being reached by mid-February, Democratic Unionist Party (DUP) leader Sir Jeffery Donaldson has threatened to withdraw ministers from the Northern Ireland parliament due to discontent over the lack of decisive government action.

The potential for talks to collapse if the UK and EU fail to reach an agreement is limiting Sterling strength.

Australian Dollar (AUD) Drops as Fed Fuels Risk-Off Trade

The Australian Dollar (AUD) slid overnight as risk-off trade swept markets following the Federal Reserve’s interest rate decision and monetary policy announcement.

Comments from Chair Jerome Powell rattled markets and heavily dented the risk-sensitive Australian Dollar after signalling the Federal Reserve will aggressively raise interest rates, starting in March.

While markets widely expected rate hikes in March, and a total of four in 2022, Powell failing to dismiss the possibility of more aggressive tightening and five interest rate rises this year spooked investors.

Powell said there is ‘quite a bit of room to raise interest rates without threatening the labour market’.

The hawkish tone also suggested to investors that the Federal Reserve will act aggressively on previous hints of reducing its balance sheet.

Meanwhile, news that Covid restrictions will remain in place in New South Wales until the end of February continues to weigh on AUD sentiment.

Pound Australian Dollar Forecast: Risk-Off Trade to Support GBP/AUD?

The Pound Australian Dollar exchange rate may experience fluctuations ahead of the weekend.

Downbeat market trade may continue to weaken the ‘Aussie’, as markets react to the Federal Reserve’s more hawkish stance, and the threat of a Russian invasion of Ukraine dampens risk appetite.

Sterling may also come under pressure before the weekend, if the report into Downing Street parties implicates Boris Johnson and increases the likelihood of a Conservative Party leadership contest.

Interest rate decisions from the Reserve Bank of Australia (RBA) and Bank of England (BoE) will also continue acting as key drivers of movement.

A change in tone from the RBA to hints at tightening policy following a higher inflation reading in Australia may support AUD.

Meanwhile, markets widely anticipate a rate hike from the BoE that continues to underpin support for Sterling.

Andrew Roberts

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