Pound Australian Dollar (GBP/AUD) Exchange Rate Falls as RBA Rate Hike Bets Increase

January 23, 2023 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Falls as RBA Rate Hike Bets Increase

Pound Australian Dollar (GBP/AUD) Exchange Rate Slides as AUD Investors Anticipate CPI Data

The Pound Australian Dollar (GBP/AUD) exchange rate fell on Monday, as AUD investors began to anticipate Australia’s latest CPI data.

At the time of writing, GBP/AUD traded at around AU$1.7682, a decline of roughly 0.6% from Monday’s opening rates.

Australian Dollar (AUD) Climbs ahead of CPI Data

The Australian Dollar (AUD) gained ground on Monday, as investors began to anticipate the release of the latest consumer inflation figures on Wednesday.

Inflation is expected to tick upward, which may bring a boost to the ‘Aussie’ as it puts extra pressure on the Reserve Bank of Australia (RBA) to continue hiking interest rates.

Analysts believe that if inflation trims down to levels between 6.1% and 6.5%, it essentially locks in a 25bps rate hike at the next RBA meeting. With this in mind, investors are anticipating further interest rate hikes beyond this initial 25bps movement.

These hopes from AUD investors were then compounded by the Australian Treasurer Dr Jim Chalmers. During an interview with Sky News, Dr Chalmers stated: ‘We've still got a big inflation challenge in our economy even as we get to the other side of the peak. Inflation will be higher than we'd like for longer than we’d like. That’s just the reality.’

As such, this leaves the impetus on the RBA to continue tightening to curtail inflation, and bring it back to the central bank’s optimum rate.

Further boosting the ‘Aussie’ on Monday was an upbeat market sentiment. As risk-on trade continued across the session, the risk sensitive Australian Dollar was able to make firm gains against other safer peers.

Pound (GBP) Slumps amid Continuing Downbeat Domestic Headlines

A lack of macroeconomic data left the Pound (GBP) vulnerable to continued domestic headwinds on Monday.

Questions over fresh waves of industrial action were on investors lips, with 300,000 nurses and doctors scheduled to strike during February. The pay dispute between various unions across different sectors and government ministers continues to drag on the UK economy, and investor sentiment towards Sterling.

Further weighing on Sterling during Monday’s session as other predictions of how desperate a situation the UK’s economy is in. Business consultancy firm EY forecasts the UK economy to contract by 0.7% in 2023, far beyond the previously predicted 0.3% fall.

Hywel Ball, EY’s UK Chair, added: ‘The UK’s economic outlook has become gloomier than forecast in the autumn, and the UK may already be in what has been one of the mostly widely anticipated recessions in living memory.’

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: Australian Inflation Data to Boost AUD?

Looking ahead for the Australian Dollar (AUD), Wednesday brings Q4’s inflation data and December’s headline CPI release.

The yearly inflation rate for Q4 is expected to rise from 7.3% to 7.5%, while headline inflation is forecast to have increased from 7.3% to 7.6% in December. As such, AUD may strengthen if these releases print to forecast, as it shows that the Reserve Bank of Australia still has work to do in terms of bringing down inflation, thus leaving room for further interest rate hikes.

Overnight on Monday, the latest Services and Manufacturing indexes for January’s activity will print for Australia. The services sector is forecast to remain in contractionary territory, but tick upward from 47.3 to 47.5. Further to this, the manufacturing sector is forecast to contract in January, with the index falling from 50.2 to 49.5.

As such, AUD may weaken at the beginning of Tuesday’s session, as the contractions in the economy may mean that the RBA has less room for higher interest rate hikes, while also pointing to a darkening economic outlook as the world lies on the precipice of a global recession.

For the Pound (GBP), Tuesday brings January’s private sector indexes. Both service and manufacturing sectors are forecast to remain in contractionary territory. This could weaken Sterling by amplifying the existing recession anxieties, as the UK continues to be on the verge of a prolonged recession.

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