The Pound Australian Dollar (GBP/AUD) exchange rate strengthened last week, despite some volatility as Bank of England (BoE) unexpectedly raised interest rates by 50bps.
What’s Been Happening: GBP/AUD Exchange Rate Capped by Fears of UK Recession
The Pound (GBP) opened the week strongly as the market geared up for the BoE’s interest rate decision.
UK inflation remained unchanged at 8.7%, further bolstering the odds of a bumper 50bps rate hike. Against expectations of a modest easing, underlying inflationary pressures exceeded forecasts, and core inflation hit a 31-year high.
The BoE then delivered a hawkish 50bps interest rate hike, but fears of the central bank tipping the UK into a recession capped any significant gains. With the cash rate hitting 5%, fears of sky-high borrowing costs could exacerbate the cost-of-living crisis.
At the end of the week, stronger-than-expected retail sales buoyed the Pound. Surprising growth in the retail sector supported Sterling but worse-than-expected PMIs offset gains.
Meanwhile, the Australian Dollar (AUD) started the week on the back foot amid dovish minutes from the latest Reserve Bank of Australia (RBA) policy meeting.
A downbeat market mood proceeded to sap demand for the risk-sensitive Australian Dollar as the week went on. Global slowdown fears weighed heavily as economies continued to struggle with inflation and surging borrowing costs.
At the end of the week, despite PMIs beating forecasts, it wasn’t enough to buoy the ‘Aussie’. A gloomy market mood kept the Australian Dollar under pressure heading into the weekend.
Three Things to Watch Out for This Week
- Australian Inflation Data
An expected further easing of inflation could temper bets for further tightening from the RBA as headline CPI is predicted to cool to 6.1%.
- UK Recession Fears
Fears the central bank’s aggressive hiking cycle could push the UK into a recession, may keep a firm lid on the Pound this week.
- Australian Retail Sales
A modest increase in retail sales could buoy the ‘Aussie’ after the sector stalled in April.
Pound Australian Dollar Forecast
Elsewhere, global market moods will continue to dictate sentiment. A gloomy market mood could keep the risk-sensitive ‘Aussie’ under pressure.