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Pound to Australian Dollar Exchange Rate Slumps after Discouraging UK CPI

September 13, 2016 - Written by Minesh Chaudhari

Risk Aversion Continued to Weigh on Australian Dollar (AUD) Exchange Rates

Despite the NAB Business Confidence Index strengthening from 4 to 6 in August the mood towards Australian Dollar (AUD) exchange rates remained bearish on Tuesday morning.

Investors were unimpressed by the accompanying drop in the Business Conditions Index, which weakened from 9 to 7 on the month to suggest that sentiment within the Australian economy is not overly positive.

As researchers at TDS noted:

‘Major services and construction industries are showing the strongest business conditions but wholesale and retail industries are not faring as well. Keep a close eye here given Q2 GDP revealed weak consumptions growth.’

With risk appetite still on the decline thanks to the buoyancy of the US Dollar (USD), the Pound to Australian Dollar (GBP/AUD) exchange rate trended higher.

Steady UK Inflation Failed to Boost Pound Sterling (GBP) Exchange Rate Demand

However, confidence in Pound Sterling (GBP) soon deteriorated thanks to the UK Consumer Price Index for August failing to show an uptick in inflationary pressure.

Forecasts had pointed towards a modest rise from 0.6% to 0.7% on the year, prompting investors to sell out of Sterling once again.

While the Producer Price Index continued to push sharply higher as the initial aftermath of the Brexit vote faded this has so far failed to feed through into the CPI, somewhat limiting the impact on the wider economy.

Even so, markets were disappointed by the data, prompting the GBP/AUD exchange rate to slump as speculation over the Bank of England’s (BoE) next policy meeting intensified.

GBP/AUD Exchange Rate Forecast to Trend Lower on Weakened UK Labour Market Data

Overnight the Westpac Consumer Confidence Index could offer greater support to Australian Dollar (AUD) exchange rates, providing that sentiment is shown to have improved in September.

Signs of greater optimism within the domestic economy could strengthen the case for the Reserve Bank of Australia (RBA) to leave interest rates on hold for the time being, something which would be ‘Aussie’ supportive.

Volatility for the GBP/AUD exchange rate is also anticipated in response to Wednesday’s raft of UK labour market data, which will include the first post-referendum wage and unemployment rate figures.

If employment conditions are found to have weakened in the wake of the Brexit vote then the Pound is likely to experience a further downtrend, with softer wage growth likely to encourage BoE dovishness.

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