Pound Australian Dollar Bounces as Wall Street Sentiment Drops
(Updated 17:00, 06/05/2022) The Pound Australian Dollar (GBP/AUD) exchange rate resumed its upward trajectory this afternoon, having fallen briefly around midday as fears over the UK’s economic outlook intensified.
Fears of a recession have seemingly been encouraged by Bank of England (BoE) policymakers and economists alike as authorities are careful not to lead markets into a false sense of security.
Downside is not limited to Sterling however: shares are sliding on both sides of the Atlantic with bearish sentiment weighing on Wall Street. The S&P 500 index is down another 1% as the FTSE 100 index sheds 1.6% to 7,384 points; Germany’s DAX (-2%) and France’s CAC (-2.3%) are also weaker.
Given the weaker market mood, the ‘Aussie’ succumbed to headwinds, as explained by Fawad Razaqzada, market analyst at City Index and FOREX.com:
‘The main source of worry is high levels of inflation around the world, which is hurting consumer pockets. On top of this, a global wave of monetary-policy tightening, which includes quantitative tightening, means stock markets can no longer rely on this source of support…
What’s more, the impact of Russia’s invasion of Ukraine continues to push up oil and gas prices, meaning inflation is unlikely to recede any time soon. Perhaps, China’s Covid lockdowns are going to help somewhat, but this is also growth-sapping. It is a lose-lose situation.’
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GBP/AUD Exchange Rate Firms as Risk-Off Trading Subdues the ‘Aussie’
The Pound Australian Dollar (GBP/AUD) exchange rate is rising this morning following yesterday’s dip, as risk-off trading conditions dent the Australian Dollar (AUD) sentiment alongside comments from the Reserve Bank of Australia (RBA).
At the time of writing, GBP/AUD is trading at A$1.7406, up 0.3% from today’s opening levels.
Australian Dollar (AUD) Drops on Weaker Growth Forecasts
The Australian Dollar is trading down against its peers so far today, as risk-off headwinds and weaker growth forecasts from the RBA sap AUD appeal.
Market mood turned sour as central banks countered rate hike action with more cautious rhetoric – investors are digesting comments from the Federal Reserve and the Bank of England (BoE) which warn that global growth will stall due to surging prices.
Meanwhile, continued fighting in Ukraine caps bullish trading, as the Russian shelling and assault of steelworks ‘do not stop’, according to Ukrainian President Volodymyr Zelenskyy. The local authority in Mariupol reports that tens of thousands of civilians remain in the besieged city, surviving in difficult conditions of humanitarian catastrophe.
Applying domestic headwinds, the RBA’s monetary policy statement – released this morning – revised down growth forecasts, forecasting a 1.75% cash rate in December 2022. The MPS also justifies the AU central bank’s latest rate hike by significantly revising up inflation forecasts.
It’s also worth noting that troubles in China, Australia’s key trading partner, join US-China tensions to add to the risk-off catalysts and weigh on the Aussie prices. The country’s services PMI printed at 36.2 yesterday – its second-worst contraction since the onset of the coronavirus pandemic in April 2022.
Pound (GBP) Slides on Recession Worries, Local Elections
The Pound (GBP) has succumbed to downside pressure this morning, slipping to a new two-year low following the BoE’s dovish press conference yesterday.
Despite upward momentum against the Australian Dollar, Sterling is weakening elsewhere on fears of a recession; in London, the blue-chip FTSE 100 index is down around 50 points following a jolting slump on Wall Street last night as the Nasdaq registered its biggest one-day decline since June 2020.
Roger Lee, head of UK equity strategy at Investec says the BoE’s forecast ‘is really the sum of all our fears’, explaining the current pressure GBP is under, while AJ Bell investment director Russ Mould, comments:
‘Concern about inflation is the culprit, as ever, and the wild swings we’ve seen this week are a reminder that sentiment is about as fragile as a porcelain doll.
The other fear is that the cure for inflation, higher rates, could be as bad as the disease if they choke off growth and even lead to recession.’
Meanwhile, upheaval in the UK’s political sphere inspires fears of volatility in the currency markets. Labour has won key London seats, with Lib Dems and Greens also benefitting from bad night for the Conservative party.
Pound Australian Dollar Exchange Rate Forecast: BoE Speeches to Inspire Sterling Movement?
Looking ahead, a lack of further Australian data today leaves the Pound Australian Dollar exchange rate to trade on speeches from BoE policymakers.
Speakers are likely to respond to concerns of a recession in the UK – if a hawkish tone is struck then GBP could enjoy support, but a moderate or even dovish tone is more likely.
Also affecting GBP/AUD is global risk sentiment – if morale improves over progress in Ukraine or positive news from China, both the Pound and the ‘Aussie’ could enjoy tailwinds.