Pound Australian Dollar (GBP/AUD) exchange rate rebounds from overnight low

Pound Australian Dollar (GBP/AUD) exchange rate firms as recession fears wane

The Pound Australian Dollar (GBP/AUD) exchange rate is rising this morning following a downturn overnight, as Pound (GBP) investors overcome fears of an embedded recession. Stronger UK data and an improvement in risk sentiment support the currency, while the Australian Dollar (AUD) suffers amid a pullback in equity markets.

At the time of writing, GBP/AUD is trading at A$1.9310, having climbed by more than 0.2% since this time yesterday.

Pound (GBP) recovers on upbeat forecasts

The Pound is firming against the majority of its peers today as markets become confident that the UK’s technical recession of Q4 2023 has abated. Positive risk sentiment, alongside forecasts of a hawkish Bank of England (BoE) are lending support to the currency today.

Dovish hints from BoE officials proliferated in the first half of the week, as Governor Andrew Bailey said it is not necessary for inflation to be at 2% for interest rates cuts to begin. In his testimony to the Treasury Select Committee on Tuesday, Bailey said:

‘We don’t need inflation to come back to target before we cut interest rates, I must be very clear on that, that’s not necessary. We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.’

Yet despite Israel’s ongoing attacks in the Middle East and conflict in the Red Sea trading passage, sentiment in the UK is upbeat. Business optimism is gaining momentum, buoying the Pound, while economists’ outlook likewise paints a positive image.

Analysts at MUFG bank remarked this morning:

‘The UK data on Thursday was indicative of an improving outlook and the technical recession that took place in the second half of last year looks like it is probably over… The upturn in risk sentiment globally will certainly allow the BoE to remain patient, similar to other central banks.’

Australian Dollar (AUD) depressed as US Dollar strengthens

The Australian Dollar is in a rut this morning, as strength in its rival US Dollar (USD) exerts pressure upon the risk-off currency. Lacklustre equity trade further dents the ‘Aussie’.

Fading hopes for imminent interest rate cuts from major central banks imply a longer period of restrictive policy pressures, dampening support for more volatile currencies. Policymakers from the BoE, European Central Bank (ECB) and the Federal Reserve are pushing back against demands for looser monetary policy, with now just a 10% chance that the latter will cut borrowing costs in March, according to CME’s Fedwatch tool.

On the other hand, hawkish sentiment from Australia’s own central bank, the Reserve Bank of Australia (RBA), has lent some support to the currency. AUD climbed overnight as minutes from the RBA’s latest monetary policy meeting indicated that the bank would not be cutting interest rates anytime soon.

Strong domestic data from earlier in the week also helps to sustain a degree of bullish momentum. Private sector activity returned to growth in February for the first time since September 2023, as expansion in the services sector boosted the Australian economy.

GBP/AUD forecast: quiet start to week leaves exchange rate exposed to losses

The Pound Australian Dollar may be influenced by UK data on Monday, as the Confederation of British Industry (CBI) releases its distributive trades index. If the confederation’s retail sales balance increased from –50 to –47 for the month of February, GBP could enjoy modest tailwinds.

Additional domestic data is scarce: instead, GBP/AUD may take direction from the release of the latest manufacturing index from the US Federal Reserve. An improvement in US manufacturing would likely buoy the ‘Greenback’, and in suggesting that the world’s largest economy is recovering could raise morale generally. A risk-on mood would support both the Pound and the ‘Aussie’, neither of which are safe-haven assets.

Olivia Evershed

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