Pound Australian Dollar (GBP/AUD) Exchange Rate Stumbles as UK Economy Contracts

Pound Australian Dollar (GBP/AUD) Exchange Rate Falls amid UK GDP and Risk-On Rally

The Pound Australian Dollar (GBP/AUD) exchange rate declined today amid a risk-on market mood and data showing that the UK economy has contracted.

At the time of writing, the GBP/AUD exchange rate is around AU$1.7633, down almost 0.4% since overnight trade.

Pound (GBP) Falls following UK GDP

The Pound (GBP) slipped this morning after the UK’s latest GDP data revealed that the economy shrank in the third quarter of this year.

Quarter-on-quarter GDP contracted by 0.2% in Q3, better than expectations of a 0.5% contraction. Meanwhile, September’s month-on-month data showed a larger-than-forecast contraction of 0.6%.

Although the Q3 figures weren’t as bad as feared, the latest data supports the Bank of England’s (BoE) recent assessment that the UK economy is heading towards a long period of negative growth.

Guy Foster, Chief Strategist at RBC Brewin Dolphin, called this ‘a classic slide into recession’.

Meanwhile, economist Samuel Tombs highlighted that the UK is a ‘global outlier’. It is the only G7 country that saw GDP fall in Q3, and the only G7 country not to have seen GDP recover to pre-Covid highs.

Chancellor Jeremy Hunt, who is currently working on a set of tax hikes and spending cuts for the fiscal statement, responded to the data. He said:

‘I am under no illusion that there is a tough road ahead – one which will require extremely difficult decisions to restore confidence and economic stability.

‘But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.’

Prospects of a long UK recession and tighter fiscal policy are weighing on Sterling today.

Australian Dollar (AUD) Rises amid Risk-On Mood

Meanwhile, the risk-sensitive Australian Dollar (AUD) is enjoying an upbeat sentiment among global investors following the US inflation figures yesterday.

Both American headline and core inflation eased more than expected – an indication that inflationary pressures may have peaked. Not only is this good news for the world economy – as high inflation has squeezed households and businesses around the world – but it has the added benefit of reducing the need for further interest rate rises.

Following the US inflation data many Federal Reserve officials advocated a slower pace of rate hikes. Higher interest rates restrict economic growth, so the prospect of rates not rising as high as initially feared was good news for markets.

GBP/AUD Exchange Rate Forecast: More Losses Ahead?

Looking ahead, risk appetite could continue to drive the GBP/AUD pair. If the market mood remains upbeat, the riskier ‘Aussie’ could post further gains.

Meanwhile, as businesses and economists continue to comment on the UK GDP data, Sterling could endure further headwinds. Any additional news about the challenges that UK firms and consumers face could weigh on GBP sentiment.

Samuel Birnie

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