Pound Australian Dollar (GBP/AUD) Exchange Rate Trends Broadly Higher despite Sterling Weakness

Pound Australian Dollar Trades Falteringly Higher as AU Inflation Worries Investors

(Updated 16:00, 29/07/2022) The Pound Australian Dollar (GBP/AUD) exchange rate has edged higher through Friday’s session despite GBP headwinds, as ‘Aussie’ investors remain downbeat following this morning’s PPI release.

Inflation expectations for the Australian Dollar remain high, as analysts at UOB Group remark:

‘Our current full-year inflation forecast of 5.0% remains, underscoring the RBA’s rapid tightening cycle since May that lifted the cash rate to 1.35% from 0.10%. [The Reserve Bank of Australia is] trying to ensure inflation expectations remain anchored around its 2-3% target.’

Increasing inflation threatens to inspire ever-more-aggressive rate hikes from the RBA, risking a recession if Australia’s economic recovery slows. The central bank reiterated at its last meeting that it is committed to doing what is necessary to ensure inflation returns to target.

Elsewhere in the UK, rail passengers are being warned that services will be disrupted over the weekend because of planned industrial action. Train drivers will go on strike in the latest outbreak of unrest over inadequate pay rises for transport staff.

Further disruption in the transport industry threatens to dent the UK’s economic recovery, triggering possible supply chain delays and weighing upon other sectors if holiday plans are abandoned. The drivers union Aslef hopes the repercussions of the walkout will encourage employers to consider a more substantial wage increase.

Original article continues below:

GBP/AUD Exchange Rate Trends Narrowly as AU PPI Surprises

The Pound Australian Dollar (GBP/AUD) exchange rate is trading sideways this morning following the release of Australia’s producer price index (PPI). Q2 data revealed that producer prices increased by 5.6% on an annualised basis, rather than the 5.3% predicted.

At the time of writing, GBP/AUD is trading at A$1.7397, virtually unchanged from today’s opening levels.

Australian Dollar (AUD) to Climb on Inflation Release?

The Australian Dollar (AUD) is trending broadly higher against its peers this morning, buoyed by higher-than-expected PPI data. Analysts at UOB Group speculate that the ‘Aussie’ could climb further on stronger trading sentiment.

Q2’s rise to 5.6% marked the biggest jump since Q4 2008 as prices hiked across building construction, petroleum fuel manufacturing and heavy and civil engineering construction. On a quarterly basis, PPI rose for the eighth straight quarter, driven by a faster economic recovery in the wake of Covid-19 disruptions.

Elsewhere, expectations for a 50bps interest rate hike from the Reserve Bank of Australia (RBA) on Tuesday may also be lending AUD support.

A Reuters poll confirms that Australia’s central bank is likely to deliver its third consecutive half-point rise next week.

‘All four major local banks – ANZ, Westpac, CBA and NAB – [are] expecting a 50-basis-point hike on Tuesday,’ remarked economists; ‘The RBA is then expected to deliver a fourth consecutive 50 basis point hike at the September meeting.’

19 of 31 economists who had a long-term view on interest rates now expect it will reach 2.35% or higher by the end of September, rather than by the year’s end as previously estimated.

Pound (GBP) Drops Following BoE Consumer Credit Release

The Pound (GBP) is tumbling against the majority of its peers as borrowing increased by more than expected in June, according to the Bank of England (BoE)’s consumer credit data.

The release shows that consumer credit rose to £1781bn rather than the round £1bn expected: above the 12-month pre-pandemic average. The annual growth rate for all consumer credit stood at 6.5% in June, up from an upwardly revised 5.8% rise in May.

This suggests that households are struggling more than previously thought to pay bills and rising living costs, having to borrow in greater amounts to make ends meet.

The news further illustrates the intensity of the UK’s cost-of-living crisis. While British consumers are unable to spend to the same extent as previously, the economy is at risk of weakening: pressure is mounting upon the Bank of England to raise interest rates and bring inflation down.

On the other hand, higher interest rates could trigger a recession; furthermore, inflation expectations have moderated.

Analysts at ING bank expect a 50bps rise from the BoE next week, followed by a quarter-point rate hike in September and potential increases on top of those; but the bank stresses that ‘the window for further rate hikes feel like its closing.’

GBP/AUD Exchange Rate Forecast: Chinese Data to Influence Pound Australian Dollar?

A lack of further data today leaves GBP/AUD to trade on external factors.

Into the weekend, Sunday’s Asian session will see the release of Chinese manufacturing and non-manufacturing PMIs, potentially inspiring movement in the ‘Aussie’. If productivity in the world’s second-largest economy has increased, the China-proxy AUD could climb.

Elsewhere, any developments in the Truss-Sunak leadership debate could sway GBP, if the UK’s political outlook becomes more certain in the days ahead.

Olivia Evershed

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