Pound Australian Dollar Exchange Rate Softens as Market Braces for Further Tightening
The Pound Australian Dollar (GBP/AUD) exchange rate is weakening as markets fear further global slowdown amid surging borrowing costs.
At time of writing the GBP/AUD exchange rate is trading around $1.9189, a 0.22% fall from this morning’s opening levels.
Australian Dollar (AUD) Undermined by Risk-Off Mood
The Australian Dollar (AUD) remains fairly quiet this morning as investors and the wider market wait for the latest US non-farm payrolls. After yesterday’s strong labour market data from the US propelled bets for the Federal Reserve to resume tightening, risk appetite waned.
The risk-sensitive ‘Aussie’ has been under relentless pressure this week amid global slowdown fears. With global business indicators pointing at slowdowns across the board, risk aversion soared, denting the Australian Dollar. Concerns over the relentless tightening cycles from central banks around the world could trigger multiple recessions. Economists at ING warn of the looming crises:
‘Where economic weakness has so far been concentrated in manufacturing, we’d expect the service sector to enter a downturn too. That would see a corresponding easing in service-sector price pressure, via lower wage growth. Central banks would turn to rate cuts much earlier than we’re currently forecasting.’
Pound (GBP) Under Pressure from Recession Fears
Meanwhile, the Pound (GBP) is trading without a clear direction as a hawkish Bank of England (BoE) is offset by lingering fears of a recession. Amid a lack of major economic data, Sterling is left exposed to market sentiment.
With financial markets expecting the BoE to continue raising interest rates from 5% to potentially 7%, fears of a recession could be keeping a firm lid on Sterling. Some economists are concerned that the central bank’s relentless tightening could push the UK into a long and shallow recession. Andy Haldane, former Chief Economist to the BoE, warned the central bank not to ‘overreact and overcorrect’:
‘Higher and stickier inflation most likely reflects the UK’s more acute supply shortages than in other countries, notably in the labour market. These constraints are raising the level of prices, probably on a persistent basis. On this diagnosis, the textbook role of monetary policy is to tolerate, not offset, these temporary inflation misses provided inflation expectations remain anchored. Not to do so inflicts unnecessary further damage on growth.’
Pound Australian Dollar Forecast: Tight US Labour Market to Sour Market Moods Further?
Amid a lack of data for either pairing, the Pound Australian Dollar exchange rate could see further movement with the release of the highly-anticipated US non-farm payrolls. With the data being crucial to the Fed’s rate hike outlook, global market sentiment could plummet if the data points to further tightening from the US central bank. The more risk-sensitive Australian Dollar could plunge, whereas the safer Pound could fare slightly better.
Turning to next week, GBP investors will switch their attention to UK labour market data and GDP growth data. An expected uptick in unemployment and a stagnant month of May for economic growth could weigh on Sterling.