BoE Report Punishes the Pound
(Updated 16:15, 05/07/2022) The Pound Australian Dollar (GBP/AUD) exchange rate eased down this afternoon after peaking earlier today, as the Bank of England (BoE)’s Financial Stability Report (FSR) triggered Sterling downside.
The report warned that global economic conditions have worsened and consequently the UK’s economic outlook is very uncertain; equity markets are also expected to remain volatile while household and business finances will become more stretched.
‘The economic outlook for the UK and globally has deteriorated materially,” the BoE said in its report; ‘Prices of essential goods such as food and energy have risen sharply in the UK and globally, and the outlook for growth has worsened. This is largely a result of Russia’s illegal invasion of Ukraine.’
Inflation is expected to rise to 11% later in 2022 and some economists believe the central bank’s base interest rate could increase to as high as 3% by the end of next year. Yet most households and businesses are expected to handle the financial burden without defaulting on mortgages and loans.
Despite this, the news has significantly dented Pound sentiment: this afternoon, GBP dropped to its lowest level against the US Dollar since March 2020.
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GBP/AUD Exchange Rate Lifts as RBA Hike Interest Rates
The Pound Australian Dollar (GBP/AUD) exchange rate is rising this morning following the Reserve Bank of Australia (RBA)’s decision to hike interest rates by 50bps. Ordinarily this would be positive for the Australian Dollar (AUD), but markets are bearish over economic growth concerns.
At the time of writing, GBP/AUD is trading at A$1.7717, up 0.5% from today’s opening levels.
Australian Dollar (AUD) Drops Following RBA Decision
The Australian Dollar has fallen against its peers this morning off the back of the RBA’s decision to hike interest rates to 1.35%. This is the highest AU interest has reached since May 2019.
Although Australia’s central bank has been hawkish in its rhetoric recently, markets remain unconvinced that a recession is off the cards. Amid global inflationary pressures, the outlook for economic growth is deteriorating.
Furthermore, money markets’ pricing implies that interest rates may reach 3.2% this year – although Governor Philip Lowe cited a less-daunting 2.5% in his warning to households and businesses.
So far, consumption in Australia has been robust, while unemployment is at the lowest its been in almost 50 years. ‘The recent spending data have been positive,’ remarked Lowe this morning.
On the other hand, rising interest rates represent a surging cost of living for Australian households. The debt-to-income ratio hit a record high of 187% in recent weeks.
Australian Treasurer Jim Chalmers acknowledges that the decision is ‘very challenging news’ for households already finding it tough.
Pound (GBP) Trades Mixed on Ongoing Cost-of-Living Pressures
The Pound (GBP) remains near its yearly low against both the Euro (EUR) and the US Dollar (USD) this morning, as trading continues subdued by weak morale, inflationary pressures and a comparatively dovish Bank of England (BoE).
Nevertheless, more drastic downside has been capped by positive PMI data. Today’s PMIs reveal that service-sector activity in the UK expanded by more than expected in June.
Overall activity was supported by companies focusing on their backlogs of work, according to the survey – although this news is tempered by feedback that PMI respondents were their gloomiest since May 2020.
‘The service sector remained in expansion mode during June,’ says Tim Moore, economics director at S&P Global Market Intelligence; ‘but persistently high inflation has started to dent discretionary spending and negatively influence demand projections across the board.’
Affected by wage pressures and rocketing fuel costs, the survey’s input prices index was the second-highest since the composite PMI began 26 years ago: this report comes as retail giant Sainsburys warns that the cost-of-living squeeze will intensify further.
UK companies are being forced to pass higher prices on to consumers, as energy, fuel and staff wages are costing more.
GBP/AUD Exchange Rate Forecast: BoE Updates to Drive Movement?
Looking ahead, today’s docket features a financial stability report from the Bank of England. Last time, the BoE missed its usual stress tests on banks citing uncertainties due to the war in Ukraine, so markets will expect an update there. They will also be listening out for clues as to the impact of higher interest rates.
Furthermore, BoE policymaker Silvana Tenreyro will speak as part of a conference on the interaction between monetary and fiscal policy. If she strikes a hawkish tone, GBP/AUD may enjoy further upside.