GBP/AUD Exchange Rate Muted as Investors Await Energy Package Unveiling
The Pound Australian Dollar (GBP/AUD) exchange rate is wavering this morning having dipped earlier in the session. Pound (GBP) investors are bearish ahead of the UK’s support package announcement, while the Australian Dollar (AUD) struggles to gain following dovish rhetoric from the Reserve Bank of Australia (RBA).
At the time of writing, GBP/AUD is trading at A$1.7079, virtually unchanged from today’s opening levels.
Pound (GBP) Pressured as Markets Brace for New Support Measures
The Pound is trending down against the majority of its peers this morning as investors await an announcement from Liz Truss at 11.30 BST. The Prime Minister will detail the support to be provided for the UK economy amid the currency energy crisis.
Ahead of the speech, markets have been trading bearishly, as experts suggest funding for the package may be fuelled by higher borrowing that the taxpayer will ultimately end up paying for. Plans to increase the government’s budget deficit could fuel a further downside, according to MUFG Bank.
Various economists concur that the outlook ahead is mixed. A statement from Capital Economics predicts an energy price freeze would ‘dramatically lower’ the near-term path of inflation but warns ‘the risks to our forecast that interest rates will rise from 1.75% now to 3.00% are increasingly on the upside’.
Furthermore, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown remarks:
‘Warnings from the Bank of England are loud and clear, the UK won’t be able to avoid a recession, so the best-case scenario is for now is that the troubled waters ahead are shallow and not deep.’
Critics of Truss’s proposed support package suggest the energy price cap should be funded instead by a windfall tax. Shadow climate change secretary Ed Miliband argues that current plans lock in profits for those benefiting from the energy crisis, in a terrible deal for the British people.
Australian Dollar (AUD) Weakens Following Lowe Speech
The Australian Dollar dropped this morning to $0.67345, tumbling by 0.5% following a dovish statement from Reserve Bank of Australia Governor Philip Lowe.
Lowe remarked that ‘the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.’ His rhetoric quashed hopes for consecutive aggressive interest rate hikes going forwards.
Lowe added that there are lags in monetary policy and it is possible that wage growth won’t pick up much further. On employment, economists at UOB group said:
‘We look for further tightening in the labour market in the next couple of months before slowing growth will likely push the jobless rate higher back towards the 3.8%-4.0% levels. Inflation remains a key risk, though we see it peaking in 4Q22, in the absence of further significant global shocks.’
Lending some support to the ‘Aussie’, UOB’s Lee Sue Ann observed that Australia’s economy had grown in line with expectations in the second quarter and exceeded annual forecasts. In the wake of yesterday’s release, she added that the country’s latest GDP painted an overall positive backdrop.
Applying further AUD headwinds, however, Australia’s two main commodities – coal and iron ore – are dropping in value as fears of a global recession weaken demand forecasts.
GBP/AUD Exchange Rate Forecast: Truss Speech to Drive Movement?
Looking ahead, the main market-moving incident today is likely to be Liz Truss’s energy package announcement. Depending on Truss’s proposals and their perceived implications, Sterling exchange rates could pick up or tumble further.
Into tomorrow, China’s inflation reading for August could influence AUD trading. If the CPI reveals that inflation rose to 2.8% – closer to the People’s Bank of China (PBoC)’s target of 3% – the ‘Aussie’ may find support.