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Pound Australian Dollar Gains on BoE Comments

October 18, 2021 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Exchange Rate Strengthens on BoE Bailey Comments

The Pound Australian Dollar (GBP/AUD) exchange rate is extending gains made at the end of last week. GBP/AUD is approximately 0.2% up on Monday morning to trade at 1.8571 at the time of writing.

Comments from Bank of England (BoE) Governor Andrew Bailey are supporting Sterling, while a risk-off global market mood is weighing on the risk-sensitive ‘Aussie’.

Pound (GBP) Buoyed by BoE Rate Hike Hints

The Pound moved higher versus the Australian Dollar at the start of Monday’s European session as more signals that the BoE will raise interest rates gave GBP/AUD a boost.

BoE Governor Andrew Bailey reiterated his concerns over rising inflation and said the central bank will ‘have to act’, again suggesting an interest rate hike could be on the way.

Bailey said:

"Monetary policy cannot solve supply-side problems - but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.
"And that's why we at the Bank of England have signalled, and this is another such signal, that we will have to act.
"But of course, that action comes in our monetary policy meetings."

With the bank forecasting that inflation will rise above 4% by the end of the year, his most recent comments follow last week’s, in which he said:

“We are going to have a very delicate and challenging job on our hands so we have got to in a sense prevent the thing becoming permanently embedded because that would obviously be very damaging.
“Unfortunately, if you look at our last forecast, it is going to go higher, I am afraid.”

Against the backdrop of increasing inflationary pressure, a mounting UK energy crisis, staff shortages and supply chain problems, investors are concerned about the impact on UK economic growth, potentially leading to stagflation.

Australian Dollar Dented by Disappointing China GDP

A global risk-off mood is pressuring the risk-sensitive Australian Dollar at the start of the week following China’s disappointing GDP growth data.

Third quarter GDP came in at 4.9% on an annualised basis, below forecasts of 5.2% and a sharp drop from second quarter growth of 7.9%. Over the last three months the Chinese economy only grew 0.2%.

In addition, a concerning slowdown in Chinese industrial production for September also dented global market risk appetite as factory activity slowed to its lowest level since March 2020 at the start of the pandemic. The reading came in at 3.1%, missing expectation of 4.5% and much lower than August’s 5.3%.

The weaker-than-expected readings have fuelled fears of a slowdown in the global economic recovery, and as the Australian Dollar acts as a proxy for the Chinese economy, the disappointing data dented AUD exchange rates.

Pound Australian Dollar Forecast: GBP/AUD Rebound Limited ahead of UK Inflation

The Pound Australian Dollar exchange rate rebound at the start of this week may remain limited in the coming days before some high-impact data on Friday.

As many investors are increasingly pricing in an interest rate rise from the BoE, the UK inflation rate reading for September may drive limited movement.

Annual UK inflation is expected to remain at a nine-year high of 3.2%, the same as August’s reading, which may fail to alter BoE policymakers’ stance on when the central bank should hike rates in response to inflation concerns.

Meanwhile, minutes from the Reserve Bank of Australia’s (RBA) latest policy meeting may cause some AUD movement.

As the minutes from the central bank are unlikely to spring any surprises on policy stance, investors will look to inflation expectations in the near term.

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