GBP/AUD Plunges as Sterling Succumbs to Inflationary Pressures
(Updated 17:10, 23/03/2022) The Pound Australian Dollar (GBP/AUD) exchange rate has fallen to a 14-month low this afternoon following UK Chancellor Rishi Sunak’s Spring Budget announcement.
The Chancellor cut fuel duty by 5p a litre, raised the threshold at which workers start paying National Insurance by £3,000 a year and announced a future 1p reduction in income tax in response to the fastest rise in the cost of living in three decades.
However, the reduction in income tax won’t come into effect until 2024 – and critics of the budget point out that the package offers little to those relying on means-tested benefits.
Dr Silvia Galandini, Oxfam’s Domestic Poverty Lead, remarks:
‘With the cost of living soaring, today’s announcements will do little to help millions of low-income families who were looking to the Chancellor for urgent support.
By only increasing benefits to 3.1% – half the rate of inflation – he has effectively cut benefits twice now in six months, risking an additional 400,000 people being pulled into poverty.’
In response to the raised threshold at which NI tax is deductible, experts argue that the move still benefits middle-income families over those on the lowest incomes. Although the threshold is higher, individuals earning over £12,570 per year will still be paying a much larger contribution to NI than they do for income tax, which is means-based.
Nick Macpherson, a former Treasury permanent secretary, summarises:
Further illustrating this point, figures from accountancy firm Blick Rothenberg show that because of the way taxes have been organised, those earning up to £41,389 will be better off from July than they are in the current tax year.
In response to accusations of ‘recklessness’ and ‘incompetence’, Sunak simply stated that ‘it was important to repair the damage to the public finances caused by the coronavirus pandemic.’
Original article continues below:
Pound Australian Dollar Exchange Rate Sinks as Risk Sentiment Buoys ‘Aussie’
The Pound Australian Dollar (GBP/AUD) exchange rate is sliding this morning as a higher-than-expected UK CPI release fails to bolster the Pound (GBP) against its risk-on peers. Meanwhile, the Australian Dollar (AUD) is climbing on stability in China and rising commodity prices.
At the time of writing, GBP/AUD is trading at A$1.7700, down 0.4% from today’s opening levels.
Pound (GBP) Stumbles Following UK CPI Release
The Pound is tumbling against its peers today in spite of higher-than-expected inflation, as fears of a dovish Bank of England (BoE) dominate trading sentiment.
The UK’s annual inflation rate climbed to 6.2% in February – 0.3% above expectations – and the highest rate since 1992. The largest price increases came from transport; furniture and household equipment; clothing and footwear; housing and utilities (namely electricity, gas and other fuels); and food.
Yet traders cannot forget that the UK central bank softened its language around the need for future rate hikes at its meeting last week, emphasising the ‘two-sided risks’ facing the economy. In Thursday’s meeting minutes, the MPC said:
‘Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow.’
Meanwhile, Rishi Sunak’s Spring budget is awaited for further trading impetus. The UK Chancellor will deliver his statement to the House of Commons just after midday BST, and is expected to announce how he plans to help Britons with the rising cost of living.
In comments ahead of the release, reporters speculate over whether Sunak will scrap the planned National Insurance rise, with one former cabinet minister saying that going ahead would be ‘suicidal’ given rising inflation and the cost of living crisis.
Australian Dollar (AUD) Supported by Commodity Prices, Risk Sentiment
The Australian Dollar is rising against several peers as a comparatively risk-on mood and rising commodity prices lend AUD upside.
Despite a lack of significant Australian data so far today, market conditions are favourable for the ‘Aussie’, as optimism over Ukraine-Russia diplomacy improves trading sentiment.
Ukrainian President Volodymyr Zelenskyy said on Tuesday that his country is ready to discuss a commitment not to join NATO, adding that he would also discuss the status of Crimea and Donbass after the ceasefire.
Meanwhile, reports from Reuters suggest that nine humanitarian corridors have been agreed in Ukraine to allow civilians to escape from cities under Russian attack – although no such route has been allocated out of Mariupol, which has come under relentless bombardment in recent days.
Elsewhere, signs of stability in China’s economy lend support to the Australian Dollar. Despite the country’s recent surge in Covid-19 infections, Chinese economic data has impressed to the upside, with retail sales rising 6.7% in the first two months of 2022 and industrial production jumping 7.5%.
Rising commodity prices also buoy AUD sentiment, as coal prices continue to climb alongside aluminium – iron ore is down on a daily basis but has risen overall this week.
Pound Australian Dollar Exchange Rate Forecast: Australian PMIs to Affect Trading?
Looking ahead, Australian PMI data may influence the Pound Australian Dollar exchange rate this evening. AU manufacturing and service-sector activity are expected to have fallen in March, exerting potential ‘Aussie’ headwinds.
In the meantime, GBP/AUD may waver as investors digest this morning’s UK inflation data. If markets anticipate a more aggressive response from the Bank of England, Sterling could enjoy some upside.