Falling UK Inflation Triggers GBP/AUD Exchange Rate Decline

January 16, 2018 - Written by Tim Boyer

STORY LINK Falling UK Inflation Triggers GBP/AUD Exchange Rate Decline

On Monday’s trading session, the Pound to Australian Dollar exchange rate made a marginal decline.

The GBP/AUD pairing opened trading in the region of 1.7358, later falling slightly to the area of 1.7327.

GBP/AUD Exchange Rate Tight after Concerning UK Inflation Stats

The Pound has seen a marginal decline against the Australian Dollar today, following the news that UK inflation has slowed in December.

The year-on-year readings have both showed a slight decline, while a minor monthly increase has also been reported.

More specifically, core inflation has slowed from 2.7% to 2.5%, while the base annual reading has dropped from 3.1% to 3%.

The annual figures (both ‘normal’ and core) have been considered the most important of today’s readings, as they may have a strong impact on future Bank of England (BoE) monetary policy.

Looking at the data, Lucy O’Carroll of Aberdeen Standard Investments has said;

‘Today’s headline number doesn’t amount to a hill of beans in isolation.

But it’s more interesting in the context of what’s been happening with inflation lately.

It appears to be steadying around 3%, and could stay close to this level for the next few months.

Looking a little further into 2018, inflation is likely to drift down gradually as the rise in prices caused by the Pound’s decline falls out of the numbers’.

If inflation does decline further in 2018, it could eventually fall beneath the pace of wage growth, which is 2.2% without bonuses and 2.5% with bonuses included.

This would finally eliminate the national wage squeeze and decline in real incomes, although consistently slowing inflation and rising wages would be needed for this outcome.

Emphasising how long a process this could be, Money.co.uk Editor-in-Chief Hannah Maundrell has said;

‘We can finally breathe a small sigh of relief as inflation has slightly fallen.

We’re by no means back to the luxury of low inflation but the fact it hasn’t risen again gives us a slight helping hand.

We aren’t out of the woods yet though, for many of us prices are still rising faster than wages, so purse strings will still be tight.

The cost of everyday items like food and household goods as well as transport continue to push up the cost of living, so budgeting is key’.

Putting the inflation data into context with regards to the Bank of England (BoE), Ben Brettell of Hargreaves Lansdown has stated;

‘Given the continued headwind posed by Brexit uncertainty, I don’t see why the Bank of England would rush to raise rates again this year.

I see last year’s quarter point move as more of a tacit admission that the cut to 0.25% was unnecessary in the first place, rather than the start of a sustained upwards trend.

I’d be somewhat surprised if rates were higher than 0.75% by the end of the year’.

Rising AU Consumer Confidence Pushes AUD/GBP Exchange Rate Higher

In addition to Pound trader uncertainty, the Australian Dollar has also appreciated in the pairing because of signs of higher consumer confidence.

The ANZ-Roy Morgan weekly consumer confidence index has shown a rise from 122 points to 123.5, which is a four-year high for the figure.

Commenting on the data, ANZ Head of Australian Economics David Plank said;

‘The rise in confidence is quite encouraging and is consistent with the positive data out on building approvals and retail sales’.

Will UK Retail Sales Stats Trigger GBP/AUD Volatility?

Looking further ahead, the Pound could appreciate against the Australian Dollar if Friday’s UK retail sales data shows annual growth as expected.

Estimates are for year-on-year growth for December’s readings, but month-on-month slowdowns.

Strong sales figures for December are typical, so pattern-matching results could raise confidence in the UK economy and boost the Pound.

The next Australian data to watch out for will come sooner, when Westpac Bank releases its consumer confidence stats on Wednesday evening.

Expectations are for a slight reduction in the confidence reading for January, which could lead to Australian Dollar to Pound losses.

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