Pound Australian Dollar (GBP/AUD) Slides as China Slips into Deflation
The Pound Australian Dollar (GBP/AUD) exchange rate is weakening despite China’s inflation dropping below zero, highlighting weakening economic growth.
At time of writing, the GBP/AUD exchange rate is around $1.9448, a 0.28% drop from this morning’s opening levels.
Australian Dollar (AUD) Supported by Improving Risk Appetite
The Australian Dollar (AUD) is finding moderate support against its peers this morning despite China falling into deflation.
The latest headline CPI reading for the world’s second-largest economy fell below zero for the first time since February 2021, but core inflation increased from June. Despite exacerbating China’s weakening economy, hopes are growing of Beijing to announce further economic stimulus to boost the economy.
Providing further support to the risk-sensitive ‘Aussie’, as well as the wider market, was a dovish tilt from the Federal Reserve. Philadelphia Fed President Patrick Harker admitted that he believes the central bank are finally at a point where they can now hold rates steady. Talking at a speech, he added:
‘Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.’
If the Fed are indeed close to ending their current hiking cycle, the market can finally breathe a sigh of relief as soaring interest rates are taking their toll on the global economy.
Pound (GBP) Undermined by Dire Economic Growth Outlook
Meanwhile, the Pound (GBP) is once again trading listlessly amid a lack of economic data. The double-edged sword of continued tightening continues to provide a dilemma for investors.
Inflation is widely accepted now to now remain far above the Bank of England’s (BoE) target rate of 2% for the next four years. With the BoE determined to rein in inflation, further policy tightening cannot be ruled out, keeping Sterling supported.
However, many economists believe that the UK could face a cocktail of problems not seen since the 1970s. The National Institute of Economic and Social Research (NIESR) has added to the echoes of concerns as they fear that the economy will not rise above its pre-Covid level until late 2024. It would represent the longest period of lost economic growth since 2008’s financial crisis.
Professor Stephen Millard, Deputy Director for Macroeconomic Modelling and Forecasting, warns of stuttering growth for at least two more years:
‘The triple supply shocks of Brexit, Covid and the Russian invasion of Ukraine, together with the monetary tightening that has been necessary to bring inflation down, have badly affected the UK economy.’
Pound Australian Dollar Exchange Rate Forecast: US Inflation to Dampen Market Moods?
Looking ahead, the Pound Australian Dollar exchange rate could see further movement from external factors. Without any major data for either pairing until Friday, the latest US inflation data could provide the biggest driver of movement. If inflation surprises to the upside, the case for further tightening from the Fed could sour market sentiment, dragging the riskier Australian Dollar down.