Pound Australian Dollar (GBP/AUD) Exchange Rate Reverses Losses as AUD Succumbs to Downside

Pound Australian Dollar Exchange Rate Corrects Up on AUD Headwinds

(Updated 16:12, 22/06/2022) The Pound Australian Dollar exchange rate reversed this morning’s downtrend to peak at a 26-day high this afternoon. The change in direction seems to have arisen from increasing downside facing the ‘Aussie’ amid a risk-off market mood – although Pound performance improved overall despite any clear catalyst for the movement.

As Federal Reserve Chairman Jerome Powell begins his testimony to the US Congress, markets’ attention is on the issue of inflation and the possible effect of rising prices upon the global economy. So far, Powell has acknowledged that high inflation could stimulate a recession, committing to successive hawkish interest rate hikes but warning that ‘Fed rate hikes won’t bring down gas or food prices.’

Pressure is on the Bank of England (BoE) to likewise commit to a more aggressive monetary policy tightening regime. With services sector inflation accelerating further, markets are concerned that domestic inflationary pressures may broaden; various economists also predict that inflation across food and drinks will likely to rise further in the coming months.

Meanwhile, AUD investors are bearish ahead of tomorrow’s June PMI release. If manufacturing and services activity dropped off in June, as expected, the Australian Dollar may tumble further against its peers.

Original article continues below:

GBP/AUD Exchange Rate Drops on UK Inflation

The Pound Australian Dollar (GBP/AUD) exchange rate is sloping so far this morning, as a risk-off mood subdues the Australian currency. Meanwhile in the UK, CPI hit 9.1% in May – although core inflation decreased slightly, to 5.9% from 6.2%.

At the time of writing, GBP/AUD is trading at A$1.7724, up 0.6% from today’s opening levels.

Pound (GBP) Weakens Overall on High UK CPI

The Pound (GBP) is experiencing downside against the majority of its peers today, as the UK’s cost-of-living crisis worsens.

While the war in Ukraine and the economic fallout from the Covid-19 pandemic are somewhat to blame, economists are quick to cite Brexit.

Vasileios Gkionakis, head of European FX strategy at Citigroup, says:

‘Inflation in the UK will be stickier over the medium to long-term because of Brexit… The economy is extremely fragile and in desperate need of more fiscal support, which is unlikely.’

The government is facing criticism from anti-poverty campaigners and charities who urge ministers to ‘do more’ to help those on the lowest incomes. Joanna Elson, chief executive of the Money Advice Trust, argues:

‘The package of further support recently announced by the government goes some way towards helping households under pressure. For those on the lowest income, however, urgent action is needed, including significantly raising benefits.’

In response to such concerns, Chancellor Rishi Sunak has assured the public that the government ‘are using all the tools at [its] disposal to bring inflation down and combat rising prices.’

Australian Dollar (AUD) Succumbs to Risk-Off Downside

The Australian Dollar (AUD) is falling this morning as downbeat market sentiment subdues the currency. Fears have resurfaced surrounding the likelihood of a global economic recession if major central banks continue to hike interest rates aggressively.

According to economists at Citigroup, the probability of the world economy succumbing to a recession is nearing 50%, as supply shocks continue to push up inflation and drive down growth:

‘The experience of history indicates that disinflation often carries meaningful costs for growth and we see the aggregate probability of recession as now approaching 50%;

Central banks may yet engineer the soft — or ‘softish’ — landings embodies in their forecasts (and in ours), but this will require supply shocks to ebb and demand to remain resilient.’

So far, the Reserve Bank of Australia has maintained a somewhat hawkish tone – yesterday’s minutes explained the rationale between June’s 50bps rate hike, noting that ‘inflation had already outpaced all expectations.’

In his speech on Tuesday, RBA Governor Philip Lowe mentioned that policymakers discussed a 25 or 50bps hike for July’s meeting, too, as ‘high inflation is cutting into people’s real incomes.’ Contrary to economists’ predictions, Lowe added that he ‘does not see a recession on the horizon.’

Pound Australian Dollar Exchange Rate Forecast: Sterling to Fall Further on Inflation Headwinds?

Looking ahead, a lack of UK or Australian data through the remainder of today’s session leaves the currencies to trade on external factors.

As investors digest this morning’s UK inflation release, the Pound Australian Dollar exchange rate could encounter downside – although this may be tempered by hopes that the Bank of England (BoE) will step up its policy tightening agenda to match other major central banks.

Olivia Evershed

Contact Olivia Evershed


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