AUD Rallies As RBA Turns Hawkish

The Pound to Australian Dollar (GBP/AUD) exchange rate weakened last week in response to growing expectations for an interest rate hike from the Reserve Bank of Australia (RBA) this week.

DAILY RECAP:

At the time of writing, GBP/AUD was trading at AU$1.9646. Down around 0.7% from the start of last week’s session, but up from the low of AU$1.9514 struck in the middle of the week.

The Australian Dollar (AUD) was rangebound through the start of last week’s session as weak risk appetite limited demand for the currency.

AUD exchange rates then shot higher in midweek trade, as the ‘Aussie’ drew notable support from the release of Australia’s consumer price index.

The Australian Bureau of Statistics’ (ABS) latest CPI figures showed that inflation accelerated from 3.4% to 3.8% year-on-year in December, outpacing forecasts it would only accelerate to 3.6%.

This remained well above the RBA’s target range and saw AUD investors rush to price a 25bps interest rate cut from the bank at its February meeting.

However, the ‘Aussie’ struggled to sustain these gains in the second half of the week, as a rebound in the US Dollar (USD) and a downturn in commodity prices robbed the Australian Dollar of a good chunk of its support.

The Pound (GBP) struggled to find any meaning direction amid low liquidity conditions resulting from the absence of any significant UK economic releases.

At the same time, Sterling sentiment remained suppressed by UK political jitters.

This stemmed from infighting within the Labour government over the decision to bar Manchester Mayor Andy Burnham from standing as an MP.

Near-Term GBP/AUD Forecast: RBA Hike to Boost the ‘Aussie’?

Looking ahead, the Pound to Australian Dollar exchange rate could come under notable selling pressure through the first half of this week as the RBA concludes its first policy meeting of the year.

If the RBA opts to hike interest rates, while also hinting that more monetary tightening may be needed in order to keep inflation under control, the ‘Aussie’ is likely to strengthen.

On the other hand, AUD exchange rates could fall sharply if the RBA disappoints by delaying its rate hikes until later in the year.

The Bank of England (BoE) will also deliver its latest interest rate decision this week.

No policy changes are expected from the BoE when it concludes its policy meeting on Thursday, but the bank’s forward guidance will be closely watched by GBP investors. If the bank strikes a more hawkish tone in should underpin Sterling sentiment through the second half of the week.