Pound Australian dollar (GBP/AUD) exchange rate reverses gains on aussie strength

GBP/AUD exchange rate slides as Australian Dollar strengthens

(Updated 16:45, 15/05/2024) The pound Australian dollar exchange rate tumbled on Wednesday afternoon, having climbed initially amid waning support for the US dollar.

Following the release of USD’s latest inflation data, the prospects of a hawkish Federal Reserve came crashing down: alongside annual and monthly core inflation, headline inflation also eased in April. Consequently, the ‘Greenback’ experienced additional headwinds and a risk-on mood prevailed, boosting the risk-sensitive ‘aussie’ above the pound.

Sterling investors may also have felt bearish on account of tomorrow’s BoE financial stability report. Commentary from BoE policymakers has been mixed recently regarding the central bank’s interest rate outlook – if speakers do not give a clear consensus on Thursday, the pound could weaken further.

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GBP/AUD exchange rate firms as USD support wanes

The pound Australian dollar (GBP/AUD) exchange rate is recovering today following an overnight slump, as weakness in the US dollar (USD) diverts support toward perceived-riskier currencies. Pound (GBP) gains are measured, however, as investors remain cautious following yesterday’s mixed jobs release.

At the time of writing, GBP/AUD is trading at A$1.8982, having climbed since the European session opened.

Pound (GBP) trends up as US dollar weakness drives momentum

The pound is firming against several peers today, buoyed by a slump in US dollar appetite. Investors are hesitant of placing bullish bets on the ‘Greenback’ ahead of this afternoon’s inflation reading, instead flocking to Sterling and other major currencies.

Nevertheless, GBP optimism is capped by yesterday’s mixed job report. Unemployment in the UK climbed in March, revealing the extent to which high interest rates are sapping hiring budgets; moreover, average wages increased, demonstrating that inflation is still driving pay growth.

Following the release of the data, Bank of England (BoE) chief economist Huw Pill remarked:

‘Rates of pay growth remain quite well above what would be consistent for meeting the 2% inflation target sustainably.’

Pill has maintained a hawkish tone in recent weeks as other BoE policymakers have erred on the side of caution. His assertion that the central bank must maintain a restrictive stance on monetary policy may be contributing towards an uptrend in support for the British currency.

Elsewhere, ongoing geopolitical tensions threaten to undermine strength in risk-sensitive currencies. Sterling is more stable than other assets but remains vulnerable to conflict-related economic shocks. Domestic politics also bears upon GBP appeal: ahead of an expected election this year, disputes within the Conservative party government sow fears of instability and confusion.

Australian dollar (AUD) losses capped by risk appetite

The Australian dollar (AUD) is receiving modest support from investors today as a risk-on mood boosts the currency against its safe haven peers. Despite disappointing wage data overnight, the ‘Aussie’ is shrugging off headwinds and firms in several exchange rates.

The plans of the Australian government to tackle headline inflation and ease cost-of-living pressures may be sparking some support for the currency. On Tuesday, Treasurer Jim Chalmers announced a cut to income taxes of an average A$1,888 a year per taxpayer alongside plans to invest in renewable energy, critical minerals and defence.

Addressing parliament, Chalmers said: ‘The number one priority of this government and this budget is helping Australians with the cost of living.

Annual inflation has more than halved from its peak in 2022 … but we know people are still under the pump. That’s why we designed our cost-of-living policies to ease these pressures.’

The government expects that Treasury measures will reduce headline inflation by approximately half a percentage point for the fiscal year ending June 2025. Such predictions may be boosting AUD, yet some analysts suggest that the Reserve Bank of Australia (RBA) still has a fight on its hands.

‘The ‘last mile’ of the Reserve Bank of Australia’s (RBA) inflation fight could remain challenging,’ speculates a representative of S&P Global Ratings.

GBP/AUD exchange rate forecast: US data in focus?

The pound Australian dollar exchange rate is likely to trade this afternoon upon the outcome of the latest US inflation release. As the data reveals whether US price pressures increased in April, or eased as forecast, the US dollar is likely to peak or plummet, with a knock-on effect across the currency market.

If core inflation weakened, bullish expectations for the Federal Reserve Bank may be revised. If the bank’s status as the most hawkish in the world’s major economies is called into question, the US dollar is likely to tumble.

A weaker US dollar could support both the pound and the ‘Aussie’. Softening inflation in the world’s largest economy indicates that price pressures are easing globally, boosting risk appetite.

Olivia Evershed

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