Pound Australian Dollar (GBP/AUD) Exchange Rate Ticks Down as RBA Promises Further Rate Hikes

December 6, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Ticks Down as RBA Promises Further Rate Hikes

Pound Australian Dollar (GBP/AUD) Exchange Rate Ticks Down as RBA Promises Further Tightening

The Pound Australian Dollar (GBP/AUD) exchange rate ticked down on Tuesday, as the Reserve Bank of Australia (RBA) promised further rate hikes.

At the time of writing, GBP/AUD traded at around AU$1.8155, showing a slight downtick from Tuesday’s opening rates, but well within normal trading boundaries.

Australian Dollar (AUD) Rallies as RBA Indicates Room for Further Rate Hikes

The Australian Dollar (AUD) made strong gains against most peers on Tuesday, following the overnight interest rate decision from the Reserve Bank of Australia (RBA).

The RBA continued their dovish attitude towards inflation, introducing the expected 25bps rate hike. However, the central bank was keen to assert that inflation remained far beyond their 2% target.

RBA Governor Philip Lowe said in an accompanying statement: ‘The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.’

Further serving to elevate the ‘Aussie’ was the Chinese government’s continued move away from its previously strict zero-Covid policy. They announced that residents of Beijing would be allowed out of their homes without proof of a negative Covid test, leading to further optimism that the Chinese economy could begin recovering.

Due to the ‘Aussie’s nature as a Chinese proxy-currency, the optimism surrounding Chinese reopening likely served to boost AUD alongside the bets of further tightening from the RBA.

Pound (GBP) Underpinned by Cooling Inflation

The Pound was underpinned on Tuesday by signs of cooling inflation. In a report published Tuesday morning, Kantar found that UK food inflation had dropped by 0.1%. While still at record highs, the news appeared to inspire modest optimism in GBP investors.

As such, investors opted to shrug off the continually darkening economic outlook for the UK. The UK’s construction PMI indicated that the sector was being struck by the recession, with the index falling to a three-month low.

Kelly Boorman, Partner and National Head of Construction at RSM UK, expanded on this news further. She stated: ‘Following a surprising uptick in September and October, the latest fall in the headline construction PMI for November paints a truer picture of the major disruption faced by the industry, as business confidence drops to the lowest level in two and a half years. There has been a significant slowdown in construction activity, with higher borrowing costs adding another layer of financial pressure for businesses as they grapple with reduced demand.’

A shift in market mood towards risk appetite also served to lift the Pound on Tuesday. With Sterling becoming increasingly risk-sensitive, moves towards risk-on trade have served to lift GBP against safer currencies.

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: AU GDP to Boost ‘Aussie’?

Looking ahead for the Australian Dollar (AUD), Wednesday brings the latest GDP data for Q3. A YoY increase from 3.6% to 6.2% is expected, while a QoQ decline from 0.9% to 0.7% is forecast. With the Australian economy looking to be in strong health, it may open the door for more aggressive rate hikes from the Reserve Bank of Australia (RBA) and boost the ‘Aussie’.

Furthermore, Thursday brings the latest RBA bulletin. Any further hints towards the Central Bank’s monetary policy may strengthen AUD.

For the Pound (GBP), macroeconomic data is lacking in the short term. As such, investors may remain focused on domestic headlines.

With industrial action continuing to unfold across the UK’s public and private sectors, investors may remain cautious about the impact on the UK’s gloomy economy. Because of this, GBP may weaken.

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TAGS: Pound Australian Dollar Forecasts