Can GBP AUD Exchange Rate Weaken Further on Rising Australian Inflation?

April 24, 2017 - Written by Toni Johnson

STORY LINK Can GBP AUD Exchange Rate Weaken Further on Rising Australian Inflation?

Risk appetite generally picked up at the start of the week, weighing down the Pound Australian Dollar exchange rate as markets reacted to the results of the first round of the French presidential election with relief.

As the odds of a fresh populist upset and victory for Eurosceptic Marine Le Pen were seen to decline investors piled back into higher-yielding assets, including the Australian Dollar.

Confidence in the Pound, meanwhile, eased in response to disappointing UK data as the strong boost seen on the back of Theresa May’s call for a general election faded.

In a discouraging sign, the CBI business optimism index for the second quarter slumped from 15 to just 1 as optimism dried up once again.

As Rain Newton-Smith, Chief Economist at the CBI, noted:

‘The combination of the weak Pound and recovering commodity prices means that cost pressures continue to build, and manufacturers report no sign of them abating over the near-term.’

Altogether the outlook of the UK economy does not appear overly encouraging at this juncture, particularly as both the uncertainty of the general election and Brexit negotiations continue to weigh on the minds of investors.
Further volatility could be in store for the ‘Aussie’ on Wednesday, though, with the release of the first quarter consumer price index report.

Forecasts point towards an uptick in domestic inflationary pressure, with the CPI expected to have risen from 1.5% to 2.2% on the year.

This would further discourage speculation that the Reserve Bank of Australia (RBA) could return to an easing bias in the near future, particularly if policymakers are seen to be taking a more hawkish view on monetary policy.
Any shortfall, however, could encourage the Australian Dollar to return to a weaker footing, with markets still unconvinced by the robustness of the domestic economy.

Expectations are not high for March’s UK public sector net borrowing figure, which is forecast to show a moderate increase in government debt.

Given the relative vulnerability of the domestic economy as its future trade relationships remain uncertain in the face of upcoming Brexit negotiations.

Later in the week the GBP AUD exchange rate could also come under pressure in response to the first quarter UK gross domestic product data.

With growth likely to have slowed on the quarter the appeal of Sterling could remain limited, especially if signs continue to point towards further slowing in the second quarter.

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