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Pound Australian Dollar Falls as AUD Boosted by Risk-On Trade

October 25, 2021 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Exchange Rate Dips amid Risk-On Mood

The Pound Australian Dollar (GBP/AUD) exchange rate is slipping again at the start of this week’s session after attempting to recover some of last week’s losses on Friday.

GBP/AUD fell approximately two cents last week before a risk-off mood on Friday helped Sterling recover modest losses.

However, a risk-on mood is supporting the Australian Dollar, pushing the GBP/AUD exchange rate over 0.2% lower to trade at AU$1.8382 on Monday morning.

Pound (GBP) Mixed as UK-EU Talks ‘Constructive’

In the absence of notable UK data releases at the start of the week, the Pound (GBP) is struggling against the Australian Dollar ahead of the UK autumn budget tomorrow.

The Pound has received some support from optimism over talks between the UK and EU on the Northern Ireland protocol.

Hopes are high that the two sides can reach a compromise on a new agreement on the trade border between Northern Ireland and the rest of the UK.

The first round of talks were described as ‘constructive’, although fundamental differences remain on the role of the European Court of Justice (ECJ).

UK government officials said:

"The talks this week were constructive and we've heard some things from the EU that we can work with.

"There's been plenty of speculation about governance this week but our position remains unchanged: the role of the ECJ in resolving disputes between the UK and EU must end.

"We need to see real progress soon rather than get stuck in a process of endless negotiation.

Australian Dollar (AUD) Soars in Risk-On Trade

The risk-sensitive Australian Dollar (AUD) received a significant boost at the start of the week from improving market risk appetite.

The mood improved as Chinese property giant Evergrande’s share price stabilised after the company announced it would concentrate on its electric vehicles unit, rather than its core property business, increasing optimism over the firm’s future.

With debts over $300bn, China’s second largest property developer faces difficulty making debt repayments and the threat of defaulting has caused market fears of an equity market selloff.

At the same time, AUD exchange rates are buoyed by rallying commodity prices, pushing up the price of some of Australia’s main exports.

As natural gas and oil prices continue soaring, coal has also surged which has in turn boosted the ‘Aussie’.

The Australian Dollar is also benefitting from investors betting that the Reserve Bank of Australia (RBA) will revise its forecasts and raise interest rates earlier than it has previously said, which was unlikely before 2024.

Against the global backdrop of soaring inflation, and despite the central bank’s intervention to supress bond yields at the end of last week, many investors believe the central bank will hike rates as soon as 2022 to combat rising inflation.

GBP/AUD Forecast: UK Autumn Budget and Australian Inflation in Focus

Looking ahead, Australian third quarter inflation, the UK autumn budget, and shifts in market risk appetite will likely be the key drivers in the GBP/AUD exchange rate in the coming days.

The Australian inflation rate is forecast to have slowed in the third quarter, down to 3.1% from 3.8%. If the data meets expectations, AUD investors may reprice their expectations for an earlier interest rate hike.

Meanwhile, the UK budget could stoke volatility in Sterling as UK Chancellor Rishi Sunak outlines spending plans, which may provide investors with insight into the government plans for the country’s economic recovery.

Market appetite will continue to drive the Australian Dollar, with headlines over positive or negative developments in the Evergrande crisis potentially causing fluctuations.

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