Pound Australian Dollar (GBP/AUD) Exchange Rate Climbs on US Debt Ceiling Pessimism

Pound Australian Dollar (GBP/AUD) Firms on Crashing Market Sentiment

(Updated 23/5/23, 16:50)

The Pound Australian Dollar (GBP/AUD) exchange rate is strengthening as fears over the US defaulting on their debts sent the market mood tumbling. House Speaker Kevin McCarthy poured cold water on optimism surrounding the debt ceiling negotiations, saying:

‘I need you all to hang with me on the debt limit, we are nowhere near a deal yet.’

The risk-sensitive Australian Dollar (AUD) tumbled on waning market mood.

At time of writing, the GBP/AUD exchange rate is around $1.8756, a 0.30% jump from this morning’s opening levels.

Original article continues below…

GBP/USD Fluctuates as IMF Predicts UK No Longer Heading for a Recession

The Pound Australian Dollar exchange rate is trading narrowly as the International Monetary Fund (IMF) no longer expects the UK to enter a recession this year.

At time of writing, the GBP/AUD exchange rate is around $1.8705, relatively unchanged from this morning’s opening levels.

Pound (GBP) Underpinned by Improving Growth Prospects

The Pound (GBP) is modestly supported this morning despite a lack of economic data. The IMF provided a moderate boost as they upgraded their economic forecasts.

After predicting a 0.3% contraction in the UK economy in 2023, the Fund now expects GDP to grow by 0.4%. The previous forecast pegged the UK having the weakest outlook of any major economy. A fall in energy costs and unexpected robust demand helped the economy. The IMF added:

‘The outlook for growth, while improving somewhat in recent months, remains subdued. Economic activity has slowed significantly from last year and inflation remains stubbornly high following the severe terms-of-trade shock due to Russia’s war in Ukraine and, to some extent, labour supply scarring from the pandemic.’

However, despite the marked upgrade, the economic outlook for the UK remains subdued. Stubbornly high inflation, compounded by unsustainable increases in wages, could prove to be tricky for the economy. The Bank of England’s (BoE) balancing act of battling inflation without straining the economy too much will be vital in the UK’s economic outlook.

Australian Dollar (AUD) Undermined by US Debt Default Fears

Meanwhile, the Australian Dollar is trading listlessly this morning as mixed PMIs were compounded by concerns over the US debt limit negotiations.

In the overnight session, manufacturing and services PMI printed to mixed success. The manufacturing sector climbed better-than-expected but remain in contraction territory. Whereas services edged lower than predicted, as it fell from 53.7 to 51.8, against expectations of 54.1. However, it still signalled the second consecutive month of expansion in the service sector.

Elsewhere, the latest meeting between President Joe Biden and House Speaker Kevin McCarthy ended in frustration as a deal could not be struck. With just 10 days left until a possible default on US debt, an agreement could not be met on how to raise the US government’s debt ceiling. The market remains cautious of a potentially catastrophic fallout if negotiations fail to materialise. The risk-sensitive Australian Dollar could remain subdued until a deal can be made.

Pound Australian Dollar Exchange Rate Forecast: UK Inflation to Dent Sterling?

Looking ahead, the Pound Australian Dollar exchange rate could see further movement with the latest inflation rate for the UK. An expected softening to 8.2% could pare rate hike bets from the BoE. However, with inflation still sky-high, and far above the target rate, the central bank still has a way to go before reining in inflation.

Meanwhile, the Australian Dollar could be left susceptible to market sentiment. Any progress in the US debt ceiling could sway market moods if an agreement could be met. If so, market moods could be buoyed, lifting the risk-sensitive ‘Aussie’.

Danny Tingle

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