Worrying BoE Agents Report leads to GBP AUD Exchange Rate Slump

September 20, 2017 - Written by David Woodsmith

STORY LINK Worrying BoE Agents Report leads to GBP AUD Exchange Rate Slump

Forecast-beating growth in UK retail sales have failed to prevent the Pound sliding against the Australian Dollar.

Yesterday, the Pound opened trading in the area of 1.6954 but closed down against the Australian Dollar at 1.6875.

Pound Slides over Mixed Messages for UK Interest Rate Hike

The Pound to Australian Dollar losses reported today have come from widespread trader uncertainty about the Bank of England (BoE).

This uncertainty has been so great that even forecast-beating retail sales figures haven’t been enough to keep the Pound up.

In August, retail sales were reported higher in all fields, with growth exceeding estimates. Commenting on the news was Ruth Gregory of Capital Economics. Gregory said;

‘Today’s retail sales figures indicate that consumers are showing an impressive resilience in the face of the ongoing real pay squeeze.

A modest pick-up in household spending should help the economy to re-accelerate a little ahead and adds weight to our view that the [Bank of England] will hike interest rates in November’.

While Gregory has been optimistic about the news, others have been less enthused. This is because while higher sales imply that the UK economy is resilient, there is still the possibility that the growth is built on unstable consumer borrowing.

This has been partly reflected in the BoE Q3 Agents Survey on business conditions. According to researchers, UK consumers are spending more on less by having to shop around to find the best way to manage the ongoing wage squeeze.

Giving another take on the stats has been Andrew Sentance, former BoE policymaker. Now a Senior Economic Advisor at PricewaterhouseCoopers (PwC), Sentance has observed that;

‘It is encouraging that retail sales proved resilient and bounced back in August. Anecdotal reports from retailers suggest that spending may have been helped by more “staycations” in response to the weakness of the Pound which pushes up the cost of overseas travel’.

Sentance has remarked that these higher sales levels are not in-keeping with expectations, however;

‘The underlying picture has not changed greatly, though. In the past three months, retail sales volumes were just over 2% up on a year ago - and the annual growth rate has been hovering around 2% for most of this year. This is substantially below the growth rate of around 4.5% recorded in the three years 2014 to 2016 when inflation was much lower’.

In spite of not meeting forecasts, Sentance still thinks that the sales stats will lead to a UK interest rate hike in November;

‘These latest figures will give further encouragement to the BoE to follow up their recent statements on the need to raise interest rates. The first rise in UK interest rates for over a decade has now become even more likely - and we could see this happen at the next MPC meeting in November’.

While Credit Suisse’s experts also think the BoE will raise interest rates in November, they have warned against this course of action;

‘We think the BoE has misdiagnosed the amount of slack and growth potential in the UK economy. The hike is unlikely to have a profoundly negative impact on the economy, but there is a risk of a non-linear response to the first rate hike in ten years’.

Australian Dollar Prints Higher on Weak US Dollar

With a limited supply of positive Australian data out today, the Australian Dollar has still advanced against the Pound by 0.4%.

This rise comes mainly from the US Dollar depreciating, but has also been caused by a Reserve Bank of Australia (RBA) statement.

In the latter case, RBA official Luci Ellis has recently spoken at an event in Sydney and given an optimistic outlook for the global economy. Ellis has said;

‘The global economy is looking better than it did a year ago. While it doesn’t seem to have picked up further recently, neither is this expansion a flash in the pan’.

GBP AUD Outlook: Losses Possible on UK Borrowing Data

The Pound may decline further against the Australian Dollar on Thursday morning, when the government borrowing figure for August is reported.

On the month, the previous surplus of 0.76bn is predicted to fall into a deficit at -6.7bn.

The previous surplus was caused by a bumper set of tax receipts, which might mean that the expected August slump doesn't cause too much Pound movement.

Also out on Thursday is the Reserve Bank of Australia (RBA) bulletin. This summarises RBA activities and may boost the Australian Dollar if it provides an optimistic outlook.

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TAGS: Pound Australian Dollar Forecasts