Pound Australian Dollar (GBP/AUD) Exchange Rate Firms as UK Government Set to Reverse More Mini-Budget Measures
The Pound Australian Dollar (GBP/AUD) exchange rate started to pick up this morning, after edging lower overnight, as markets await a suspected U-turn from the UK government on its controversial mini-budget.
At the time of writing, GBP/AUD is trading at AU$1.7911, up marginally from the start of today’s European session but down around 0.23% from yesterday’s high.
Pound (GBP) Gains ahead of Expected Policy Backpedal
The Pound (GBP) is ticking higher this morning after trimming yesterday’s gains in overnight trade. The upside comes as UK markets eagerly anticipate a huge policy U-turn from Prime Minister Liz Truss and Chancellor Kwasi Kwarteng.
Truss and Kwarteng have come under intense pressure from MPs, markets and voters to reverse their disastrous mini-budget. The new government’s flagship fiscal plan – which featured huge amounts of unfunded spending – triggered a run on the Pound and an emergency intervention from the Bank of England (BoE) after pension funds nearly collapsed.
Since then, a number of policy U-turns have helped the Pound recover. Yesterday, speculation that another climbdown was imminent saw GBP/AUD surge.
The Pound ‘Aussie’ pair eased lower overnight as UK trade thinned out but picked up again this morning.
Kwasi Kwarteng has flown home early from Washington, where he was meeting with world finance ministers at an International Monetary Fund (IMF) event. The unscheduled return to the UK suggests that the expected U-turn may be imminent.
The Pound is rising again amid hopes that Truss will reverse more measures from the mini-budget. However, markets seem highly sensitive, so we may see increased volatility later in the session.
Australian Dollar (AUD) Cushioned by Risk-On Mood
Meanwhile, the risk-sensitive Australian Dollar (AUD) managed to claw back some of yesterday’s losses overnight amid a risk-on market mood.
Asian equity markets rallied overnight, in part due to the apparently improving situation in the UK financial markets. Although UK economic developments don’t usually affect global sentiment, the scale of a potential financial crash in the UK had spooked international investors.
In addition, China’s latest inflation rate reading printed largely as forecast. Yi Gang, Governor of the People’s Bank of China (PBoC), said that inflation remains well within the bank’s target rate, pointing to financial and monetary stability in the world’s second-largest economy.
Although the ‘Aussie’ Dollar is heading lower against a strengthening Pound today, the ongoing upbeat market mood may be limiting AUD’s losses.
GBP/AUD Exchange Rate Forecast: U-Turn to See Sterling Soar?
Although the week is almost over, don’t expect things to quieten down. Today could see further big swings in GBP/AUD.
Investors are waiting for Truss and Kwarteng to announce the expected U-turn. If the government caves and backpedals on plans to ditch the planned corporation tax hike, the Pound could climb.
However, the magnitude of the U-turn is vitally important. Markets have priced in a significant change in position on corporation tax. An upside in Sterling may come as investors then price in further reversals of the mini-budget in the future, given Truss’s weakened position.
But if the government opts for a smaller policy change, or defies markets and MPs by refusing to budge, Sterling could slip.
As for the ‘Aussie’, risk appetite will likely remain the deciding factor. US data later in the day could affect the market mood. Strong American retail sales and consumer sentiment may create a ‘good news is bad news’ situation in markets, with upbeat US data increasing the likelihood of ongoing aggressive action from the Federal Reserve.