Pound Australian Dollar Exchange Rate Drops as UK Government Bonds Tumble
The Pound Australian Dollar (GBP/AUD) exchange rate is trending lower this morning in spite of worse-than-expected construction data from Australia. In the UK, 10-year government bonds are heading for the biggest monthly fall since 1986 as inflation surges.
At the time of writing, GBP/AUD is trading at A$1.6956, down 0.3% from today’s opening levels.
Pound (GBP) Falls on Poor Bond Performance
The Pound (GBP) has dropped against its peers so far this morning, as falling government bonds reflect the rising borrowing costs associated with high inflation and rising interest rates.
The yield on 10-year gilts has risen to 2.747% from 1.84% at the end of last month, as traders demand a higher return for holding UK debt. This is amid forecasts that inflation could hit 22% next year, pushing UK living costs to new highs.
Prime ministerial candidate Rishi Sunak has commented on rising borrowing costs, saying it would be complacent and irresponsible to ignore the risk of markets losing confidence in the UK economy.
In an interview with the Financial Times, Sunak criticised the proposed tactics of his rival candidate, Liz Truss, who advocates a review of the Bank of England (BoE)’s mandate. Truss has indicated that she would consider curbing the central bank’s independent decision-making mechanisms.
In response, Sunak argued that the bank has all the tools it needs to fight inflation, though conceded ‘Because of the structure of QE [quantitative easing], we’re particularly much more sensitive to an upward rate cycle than we have been.’
Illustrating the impact of recent economic developments on market sentiment, Lloyds Bank’s monthly barometer of business confidence dropped to 16% in August from 25% in July – touching its lowest levels since early 2021.
Australian Dollar (AUD) Climbs, though Gains May be Short-lived
The Australian Dollar (AUD) has found support this morning as upbeat data from China lent AUD tailwinds and the US Dollar (USD) struggled to firm ahead of key employment data.
China’s NBS manufacturing PMI printed at 49.4 in August – above last month’s 49 and almost reaching expansion territory. Meanwhile, the country’s non-manufacturing PMI hit 52.6, above expectations of 52.2.
Nevertheless, analysts forecast that the ‘Aussie’ will retreat against its peers in the near term, as bearish momentum takes a hold. Risk aversion is growing amid fears regarding aggressive policy tightening from central banks, as well as energy price dynamics.
Today marks the beginning of Russia’s three-day shutdown of the Nord Stream 1 pipeline, allegedly for maintenance. Gas flows will now cease until 3 September.
Exacerbating AUD headwinds, construction data for Q2 2022 printed at -3.8% rather than 0.9% as expected. This marked the second straight quarter of retreating construction activity and the steepest decline since the September quarter of 2016.
Furthermore, China’s better-than-expected PMI data has failed to fully quash fears of an economic recession. Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, observes:
‘Worries have resurfaced about weakness in China, with the latest snapshot of activity showing all the hallmarks of an economy struggling to regain its footing.’
Pound Australian Dollar Forecast: UK Headwinds to Keep Exchange Rate Subdued?
Looking ahead, Australian Dollar investors may exercise bearish restraint through today’s European session, ahead of the release of the Ai Group’s manufacturing index overnight.
Meanwhile, however, Sterling is unlikely to make significant gains amid economic woes and political uncertainty. Additional strike action is also in the pipelines, potentially pressuring GBP further against its peers.