Pound Australian Dollar (GBP/AUD) Exchange Rate Dented by Improved Market Mood
The Pound Australian Dollar (GBP/AUD) exchange rate weakened on Friday morning as market risk appetite increased on hopes of easing Ukraine tensions.
GBP/AUD dipped despite UK retail sales for January rebounding from December’s sharp contraction, suggesting the UK’s cost-of-living squeeze had limited impact on consumer spending last month.
With the risk-sensitive Australian Dollar receiving support from an improved market mood, GBP/AUD has fallen further below AU$1.89.
Pound (GBP) Struggles Despite Rebounding UK Retail Sales
The Pound (GBP) failed to gain support from rebounding UK retail sales data for January released this morning.
Retail sales rose more than expected by 1.9% last month, above forecast of 1% and a sharp recovery from December’s -4% contraction.
Office for National Statistics (ONS) Director of Economic Statistics, Darren Morgan, commented:
“After a sluggish December where the Omicron wave had a significant impact, retail sales rebounded in January with their biggest monthly rise since the shops reopened last spring.”
The figures indicated the largest monthly increase since lockdown restrictions ended last spring and means retail sales are 3.6% above pre-pandemic levels.
The ONS explains the recovery:
“Household goods stores sales volumes rose by 7.5% in January 2022 because of strong growth in furniture and lighting stores (16.6%) and electrical goods stores (16.0%).
“Sales volumes were 3.6% above their February 2020 levels.”
Against the backdrop of a squeeze on household incomes, soaring inflation, and upcoming tax increases, stronger retail sales may ease some concerns over the UK’s economic growth outlook.
However, many analysts see the cost-of-living crisis increasing pressure on the retail sector in the coming months.
Sam Miley, senior economist at the CEBR, commented:
“Sales volumes returned to growth in January as the partial reversal of Omicron effects put upward pressure on consumer activity. Despite this monthly uptick, downside risks remain for the retail sector, notably the emerging cost of living crisis. Other data released this week showed that real earnings are now falling.
“This trend is expected to continue over the coming months, leading to an erosion of consumer spending power and subsequent changes in the scale and structure of spending. Retail activity is likely to fall as a result.”
Australian Dollar (AUD) Buoyed by Increased Risk Appetite
The risk-sensitive Australian Dollar (AUD) strengthened across the board at the start of Friday’s session as market mood improved.
News that US Secretary of State Antony Blinken will meet Russian Foreign Minister Sergei Lavrov next week lifted optimism diplomacy may avoid a conflict in Ukraine.
Blinken accepted the invitation to meet Lavrov provided no invasion of Ukraine takes place, improving market mood on the prospect of the situation de-escalating.
The US Secretary of State warned the threat of Russia invading Ukraine is a ‘moment of peril for the lives and safety of millions of people.’
Tensions remain heightened as Nato, the US and European countries warn an invasion could still be imminent despite Russian claims it began moving some of its troops away from the border after completing military drills.
Meanwhile, German Foreign Minister Annalena Baerbock warned on Friday morning that Russia is risking peace with Cold War-like demands and Moscow should take ‘serious steps towards de-escalation.’
Pound Australian Dollar Forecast: Ukraine Crisis to Continue Driving Volatility?
The Pound Australian Dollar exchange rate looks likely to remain sensitive to developments in the Ukraine crisis going into the weekend.
If tensions appear to ease ahead of Blinken’s meeting with Lavrov, market risk appetite may return and pressure the GBP/AUD exchange rate.
Australian PMI data for February released on Sunday evening may drive additional movement in the Australian Dollar, as forecasts point to the services PMI reaching 50, the mark that indicates growth, after January’s contraction.
However, the Pound may receive support on Monday as the UK’s PMIs for February point to stronger business activity in the manufacturing and services sectors.