Pound Australian Dollar (GBP/AUD) Exchange Rate Drops as UK Headwinds Multiply

GBP/AUD Exchange Rate Extends Decline as UK Recession Fears Escalate

(Updated 16:15, 16/09/2022) The Pound Australian Dollar (GBP/AUD) exchange rate continues to weaken this afternoon as Sterling succumbs to heavy selling pressure on fears that the UK may already be in a recession.

On the anniversary of Black Wednesday, Sterling hit a 37-year low against the US Dollar (USD) and a 17-month low against the Euro (EUR): analysts at Capital Economics commented ‘The 1.6% drop in retail sales volumes in August supports our view that the economy is already in recession.’

Furthermore, Martin Beck, the chief economic adviser to the EY Item Club observed: ‘Real household incomes are still on course for a significant fall over the next 12 months or so. And with unemployment likely to rise, if modestly by the standards of past downturns, and the geopolitical outlook also full of uncertainties, confidence is unlikely to see much of a revival.

So, the recession which retailers currently find themselves in is likely to persist through the rest of this year and into 2023.’

Such downbeat analyses keep GBP sentiment low, while the Australian Dollar is supported by upbeat comments from Reserve Bank of Australia (RBA) Governor Philip Lowe. Lowe said that the central bank is ‘committed to returning inflation to the 2-3% bank target over time but trying to achieve it, without damaging the economy’.

Original article continues below:

Pound Australian Dollar Exchange Rate Weakens as UK Sales Fall

The Pound Australian Dollar (GBP/AUD) exchange rate is trending down this morning following the release of the UK’s August retail data. Sales fell by 1.6% last month rather than the 0.5% forecast, marking the biggest decline so far this year.

At the time of writing, GBP/AUD is trading at A$1.7024, down 0.6% from today’s opening levels.

Pound (GBP) Tumbles on Poor Retail Data

The Pound (GBP) is falling against its peers today as weaker-than-expected retail data depresses Sterling sentiment. August’s reading printed at -1.6% as rising prices and the higher cost of living weighed upon consumer spending.

Sales fell in all the main sectors, including food, auto-fuel and non-food items such as sports equipment, toys, furniture and lighting. Providing some relief is news that compared with pre-coronavirus levels in February 2020, total retail sales were still 0.5% higher.

Lisa Hooker, industry leader for consumer markets at PwC, looks to the months ahead:

‘As we approach the critical Golden Quarter in the run up to Christmas, retailers will be looking with anticipation to the outcome of next week’s mini budget.

The confirmation of an energy price cap and possibility of tax cuts may boost wavering consumer spending, but businesses will also be looking for help to alleviate soaring utility costs of their own.’

Other analysts consider that today’s data indicates the UK is already in recession. Olivia Cross, assistant economist at Capital Economics, remarks:

‘Retail sales will probably continue to struggle as the cost-of-living crisis hits harder in the coming months. But nonetheless the Bank of England will still have to raise interest rates aggressively.’

The prospect of aggressive monetary policy tightening from the Bank of England (BoE) may help to offset GBP headwinds through today’s session, as policymakers come under further pressure to tackle inflation in the UK.

Australian Dollar (AUD) Supported by Chinese Data

The Australian Dollar (AUD) is trending up against several peers this morning despite an overall risk-off sentiment, as positive data from China lends support to the currency.

As a perceived-riskier investment, AUD usually weakens through volatile trading periods. However, strength in the Chinese economy acts as a tailwind to the ‘Aussie’ given the two countries’ close trading relationship.

Industrial production in the world’s second-largest economy increased in August on an annualised basis, printing at 4.2% rather than remaining at 3.8% as expected. Furthermore, retail sales expanded by 5.4% in the year to August.

The National Bureau of Statistics of China observed that today’s release marked the third straight month of increase in retail trade and the strongest pace in the sequence. Consumption in the country improved as Covid-19 curbs were relaxed, with people spending more on home appliances, clothing and office supplies.

An increase in the value of Australia’s key commodities may have lent additional support to the ‘Aussie’: the prices of coal and iron ore are both increasing today.

Pound Australian Dollar Exchange Rate Forecast: External Factors to Drive Movement?

Looking ahead, external factors such as risk sentiment and political developments are likely to drive movement in the Pound Australian Dollar exchange rate today, given the lack of data scheduled for this afternoon.

If market mood remains downbeat, Sterling could recoup some losses against AUD, given its relative risk-off status. On the other hand, further analyses from UK economists and broadcasters could dampen GBP sentiment as experts focus upon the worst decline in British sales since December 2021.


Olivia Evershed

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