The Pound to Australian Dollar (GBP/AUD) exchange rate fell to its weakest level since late June last week as stronger Australian economic data reinforced expectations for further Reserve Bank of Australia interest rate hikes.
At the time of writing, GBP/AUD was trading around AU$1.9073, down approximately 1% over the week.
DAILY RECAP:
The Australian Dollar (AUD) proved remarkably resilient last week, with the risk-sensitive currency defying the broader deterioration in market sentiment linked to renewed conflict in the Middle East.
While risk appetite weakened during the second half of the week as geopolitical tensions intensified and oil prices climbed, the ‘Aussie’ avoided a sharper sell-off thanks to stronger domestic economic data.
AUD investors were particularly encouraged by Australia’s latest employment report, which showed the economy created more than 76,000 jobs in June.
Together with stronger-than-expected July PMI readings, the figures reinforced expectations for further Reserve Bank of Australia (RBA) interest rate hikes and helped the Australian Dollar end the week firmly higher.
Meanwhile, the Pound (GBP) struggled to attract sustained support as rising UK government borrowing costs unsettled investors.
Although higher global energy prices contributed to the rise in gilt yields, markets also focused on Prime Minister Andy Burnham’s first wave of cost-of-living measures.
The removal of VAT on domestic electricity bills and tax relief for hospitality businesses raised fresh questions over how the government intends to finance the measures while remaining within Labour’s fiscal rules.
A busy week of UK economic data provided only mixed support for Sterling. Strong employment and retail sales figures were offset by softer inflation, which kept expectations for further Bank of England (BoE) interest rate hikes in check.
Near-Term GBP/AUD Forecast: Cautious BoE to Sap Sterling Sentiment?
Looking ahead, the Bank of England’s latest interest rate decision is expected to be the main driver of the Pound to Australian Dollar exchange rate this week.
Markets widely expect policymakers to leave interest rates unchanged, placing the emphasis on the Bank’s forward guidance.
Sterling could come under renewed pressure if the BoE continues to emphasise downside risks to growth and maintains a cautious policy outlook.
However, if policymakers acknowledge that rising energy prices have increased inflation risks and leave the door open to further tightening, the Pound may stage a recovery.
For the Australian Dollar, attention will focus on Australia’s quarterly inflation report. A stronger-than-expected rise in consumer prices would reinforce expectations for further RBA interest rate hikes and could provide additional support for the ‘Aussie’.
Our currency coverage draws on live market data, official economic releases and published bank research.
