Pound Australian Dollar Exchange Rate News: GBP/AUD Slipped on Soaring UK Inflationary Pressures

August 31, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate News: GBP/AUD Slipped on Soaring UK Inflationary Pressures

Pound (GBP) Hindered by Soaring Food Price Inflation

The Pound (GBP) continued to struggle amid the UK’s cost-of-living crisis as food price inflation surged to the highest level since 2008.

Shop prices for food rose annualised by 5.1% in the month of August, up from 4.4% in July. The war in Ukraine has pushed up prices for farmers, rapidly increasing the prices for basic items such as margarine, milk, and crisps.

The biggest increase since the 2008 financial crisis, consumers will continue to feel the living cost crunch in the coming months, according to Mike Watkins, head of retail and business insight at NielsenIQ. He said that consumers were already cutting back on their food shopping ahead of the surging energy bills in the autumn. He added:

‘We can expect this level of food inflation to be with us for at least another six months but hopefully some of the input cost pressures in the supply chain will eventually start to ease.’

Meanwhile, political uncertainty continued to weigh heavily on the Pound as the Conservative leadership race approaches the last stretch. Frontrunner Liz Truss and rival Rishi Sunak will be attending the final hustings in the Tory leadership race. The new prime minister will be announced on Monday after polling closes on Friday.

With Liz Truss the favourite to take the reins of outgoing Prime Minister Boris Johnson, GBP investors remain concerned that Truss’ fiscal policies will not be sufficient, or well-funded, to deliver the UK out of the economic quagmire it finds itself in.

Australian Dollar (AUD) Boosted by Positive Chinese PMI

The Australian Dollar (AUD) enjoyed moderate success on Wednesday as positive Chinese PMI data showed a marginally improving Chinese economy, buoying the risk-sensitive ‘Aussie’.

An improvement in the world’s second largest economy lends considerable support to both global market sentiment and the Australian Dollar, a proxy currency to China. Manufacturing PMI printed better than expected at 49.4, above a forecasted 49.2. Meanwhile, non-manufacturing continued a third month of expansion but still declined to a three-month low amid surging Covid cases and subsequent shutdowns.

However, limiting any significant gains for the ‘Aussie’ could be the growing concerns of an enduring economic slowdown in China. Despite the economy-boosting 1 trillion Yuen fiscal support package, Covid disruptions threaten to derail the economy just as it was starting to recover. Chinese authorities have imposed restrictions in several cities due to soaring cases as China maintains its strict zero-Covid policy.

Elsewhere, economists at ANZ have downgraded their GDP forecast for China amid persisting economic troubles. They added:

‘The government is inclined to tighten its zero-COVID approach ahead of the 20th Communist Party Congress from 16 October. Domestic activity will likely be disrupted. China’s export cycle is turning as port activity slows and global supply chain activities falter.

‘We have trimmed our 2022 GDP forecast to 3.0% from 4.0% as both domestic and external demand continue to weaken.’

GBP/AUD Exchange Rate Forecast: Manufacturing PMIs to Sink Sterling Further?

Looking ahead, with data thin on the ground for the rest of Wednesday, all eyes will be on the release of the manufacturing PMI data for both the UK and Australia. An expected slump in the UK manufacturing sector would be the first contracted since May 2020.

Meanwhile, Australian PMI is expected to remain in expansion territory. Despite expected to fall to the lowest level in a year, manufacturing PMI could still mark the 27th consecutive month of improvement, bolstering the ‘Aussie’.

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