GBP/AUD Extends Uptrend Ahead of BoE Decision
(Updated 16:50, 02/02/2022) The Pound Australian Dollar (GBP/AUD) exchange rate continued trending up this afternoon as GBP investors shrugged off political headwinds, focusing instead on the Bank of England (BoE)’s interest rate decision tomorrow.
Bearish forecasts from several economists failed to suppress Sterling demand: Deutsche Bank’s Sanjay Raja expects that more ‘modest’ tightening will be necessary to keep the economy stable, while French lender BNP Paribas remarked:
‘The MPC is likely to be less hawkish next week than [the rate hike] alone would imply, while we remain of the view that it will deliver a more gradual pace of rate hikes than is priced into markets.’
Meanwhile, the Australian Dollar faced additional downside as risk appetite weakened. Risk-on currencies tumbled as market confidence was undermined by softening US Treasury bond yields, the Russia-Ukraine conflict and poor US jobs data.
Original article continues below:
Pound Australian Dollar Exchange Rate Trends Up as Lowe Strikes Dovish Tone
The Pound Australian Dollar (GBP/AUD) exchange rate is rising this morning in the wake of a dovish speech from Reserve Bank of Australia (RBA) Governor Philip Lowe. Markets are trading with caution ahead of tomorrow’s Bank of England (BoE) interest rate decision.
At the time of writing, GBP/AUD is trading at A$1.9001, up 0.2% from today’s opening levels.
Australian Dollar (AUD) Tumbles on RBA Comments
The Australian Dollar (AUD) is unable to take advantage of US Dollar (USD) weakness this morning, as dovish comments from RBA Governor Philip Lowe weigh upon the currency.
Governor Lowe cautioned this morning that the end of quantitative easing measures doesn’t mean a cash-rate rise is imminent. He added that the central bank is prepared to be patient and it’s too early to conclude that inflation is sustainably within its target range.
In a Q & A session following the speech, Lowe then reiterated that a rise in inflation does not require an immediate response and that the risk of inflation getting out of hand is very low. He also said that it’s still plausible the first rate rise is a year or longer away.
In comparison with the actions of other banks, the RBA’s stance is particularly dovish: the Federal Reserve expects to hike rates upwards of three times this year, while the Bank of England is forecast to raise interest rates by 25bps tomorrow.
Nevertheless, several economists remain confident that the RBA will hike interest rates this year in spite of Lowe’s comments.
‘The RBA’s forecasts and the governor’s narrative don’t quite marry up’ commented Gareth Aird, CBA’s head of Australian economics; KPMG senior economist Sarah Hunter remarked ‘I think [a hike] is more likely to [occur at] the November meeting, or certainly towards the end of this year.’
Pound (GBP) Trades Mixed Ahead of BOE Decision
The Pound is trading in a mixed range against its peers this morning ahead of the Bank of England’s interest rate decision tomorrow. Markets expect the central bank to hike rates by 25bps, to 0.5%.
Economists at Bank of America Global Research comment that the BoE is likely to confirm it will ‘cease gilt reinvestments’ when it hikes in February, starting ‘passive’ quantitative tightening (QT).
Nevertheless, they do not expect the news to provide significant trading impetus in a month ‘which has historically presented seasonal headwinds to Sterling.’
Capping GBP gains are ongoing security concerns relating to the Russia-Ukraine conflict. In his first public comments on the matter since December, Putin accused the West of using Ukraine as ‘tool to hinder Russia’.
The US secretary of state, Antony Blinken, spoke with the Russian foreign minister yesterday in an effort to defuse the crisis.
According to a senior state department official, Blinken told minister Sergei Lavrov ‘If Putin doesn’t intend war or regime change, this is the time to pull back.’
GBP/AUD Exchange Rate Forecast: BoE Interest Rate Decision Eyed
Looking ahead, tomorrow’s interest rate decision from the Bank of England is likely to be the main trading impetus in the near-term.
If the central bank hikes interest rates as expected, Sterling could enjoy tailwinds; any dovishness from policymakers, however, could dent GBP sentiment.
Meanwhile, Australia’s finalised services PMI is expected to confirm a decrease in January’s service-sector activity, potentially subduing AUD further. An increase in the country’s trade surplus, however, could lend the ‘Aussie’ some support.