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Pound Australian Dollar Extends Losses as UK Inflation Dips

October 20, 2021 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Exchange Rate Slides on Slowing UK Innflation

The Pound Australian Dollar (GBP/AUD) exchange rate is extending its losses today, down approximately 0.4%. The pairing has fallen since the beginning of this week’s session to trade at 1.8377 at the time of writing.

GBP exchange rates have dipped as the UK’s inflation reading for September released this morning unexpectedly slowed to 3.1% from 3.2%.

Meanwhile, the Australian Dollar is strengthening amid a risk-on market mood and rising commodity prices.

Pound (GBP) Dips Following Surprise Inflation Slowdown

The Pound is weakening across the board today after the UK inflation rate surprised by coming in at 3.1% in September, lower than the 3.2% forecast and August’s reading.

Mike Hardie, head of prices at the ONS, explains the dip in inflation:

“Annual inflation fell back a little in September due to the unwinding effect of last year’s ‘Eat Out to Help Out,’ which was a factor in pushing up the rate in August.
“However, this was partially offset by most other categories, including price rises for furniture and household goods and food prices falling more slowly than this time last year.”

After recent comments from Bank of England (BoE) policymakers that increased expectations for an interest rate hike, this morning’s inflation rate release has raised doubts over the central bank hiking rates in November.

Following the inflation data, the chances of an interest rate hike from the BoE in its November meeting fell.

While the BoE expects inflation to rise to over 4% by early next year, September’s data may cause a delay in the bank making a decision, which has dented the Pound.

However, Sterling’s losses may be short-lived as some economists view slowing inflation as temporary.

Paul Dales of Capital Economics predicts inflation could hit 5% next April, commenting:

”This feels a bit like the lull before the storm as the 12% rise in utility prices on 1st October will probably lift CPI inflation to around 3.8% in October.
“And we think inflation could then climb to around 5.0% in April next year due to a further rise in utility prices and the upward influence from global/domestic product shortages.
“With underlying wage growth and inflation expectations rising, the BoE is concerned that higher inflation will become embedded in the system. That’s why it become much keener to raise interest rates.”

Australian Dollar Extends Rally amid Risk-On Mood

The risk-sensitive Australian Dollar is extending its gains today, benefitting from risk-on trade.

Rising commodity market prices are also bolstering AUD exchange rates. With global prices of gas and oil soaring, coal prices have jumped and in turn boosted the commodity-linked ‘Aussie’.

The Australian Dollar has been underpinned by prices rises in some of the country’s other important exports, such as zinc recently hitting a 14-year high, and aluminium reaching a 13-year high.

At the same time, Australia’s vaccine rollout is also boosting optimism in the country’s economic recovery. Over 70% of Australian adults over 16 are fully vaccinated, hitting the government’s target for reopening and easing lockdowns.

Pound Australian Dollar Forecast: Australian and UK PMIs in Focus

The Pound Australian Dollar exchange rate looks set to remain pressured over the next few days if investors lower expectations for the BoE to raise interest rates following this morning’s UK inflation figures.

Meanwhile, Australian and UK PMI data will likely drive movement in the pairing.

Forecasts point to Australian manufacturing activity slowing in October, dropping slightly from 56.8 to 56, while the service sector is expected to remain in contraction territory, although improving and moving closer to the 50 mark that indicates growth at 48.

Slowing expansion in the UK’s private sector may weigh on GBP exchange rates on Friday, with manufacturing expected to slow to 55.8 from 57.1 and services down to 54.5 from 55.4.

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