Pound Australian Dollar (GBP/AUD) Exchange Rate Soars on RBA Forward Guidance

November 2, 2021 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Soars on RBA Forward Guidance

GBP/AUD Exchange Rate Rockets as RBA Decision Fails to Excite

The Pound (GBP) has shot up against the Australian Dollar (AUD) today as the ‘Aussie’ faces headwinds over dovish messaging from the Reserve Bank of Australia (RBA).

At the time of writing, GBP/AUD is trading at A$1.8284, up 0.7% from today’s opening levels.

Australian Dollar (AUD) Sinks on RBA Forward Guidance

The Australian Dollar (AUD) has fallen against its peers today as the latest monetary policy decision from the Reserve Bank of Australia fails to inspire confidence amongst AUD investors.

While the RBA scrapped the 0.1% target yield on its April 2024 government bond as a result of ‘economic improvement’ and ‘earlier than expected progress over the inflation target’, the central bank kept the cash rate unchanged at a record low of 0.1% for the twelfth month in a row.

Investors had hoped an earlier interest rate hike may be announced, as last week’s data showed that core inflation had jumped into its 2-3% target band – Governor Philip Lowe said, however, that the latest data and forecasts did not warrant a rise in 2022.

In his speech this morning, Lowe reiterated that ‘it is still entirely plausible that the first increase in the cash rate will not be before the maturity of the current target bond – that is, the bond with a maturity date of April 2024.’

He added that ‘it is now also plausible that a lift in the cash rate could be appropriate in 2023’ – but this still disappoints expectations of a 2022 rate hike.

Economists at MUFG Bank expect the Australian Dollar to head lower still in the near-term, as they predict the RBA will ‘lag the Norges Bank, RBNZ, BoE, BoC and Fed in raising rates.’

Various sources note a ‘shift in language’ and ‘encouraging comments’: but these are tempered with clear dismissals of hopes for imminent action. Lowe waved away market predictions of an interest rate rise as soon as next March, calling them ‘a complete overreaction to the recent inflation data.’

Pound (GBP) Subdued Overall as BoE Rate Hike Considered Unlikely

Despite trending up against the Australian Dollar (AUD), the Pound is subdued against the majority of its peers as a lack of significant data leaves Sterling to trade on rate hike expectations.

While investors had been optimistic previously, mixed signals from central bank officials are weighing upon market sentiment: hawkish comments from some BoE policymakers (such as Michael Saunders) seem to support the chances of a rate hike, while other MPC members urge a cautious approach.

Market pricing of future UK interest rates seems to imply a 15bps rate hike is now priced in, but Martin Beck, senior economic advisor to the EY ITEM Club, predicts the committee will be split. His opinion is that a majority will vote to leave borrowing costs unchanged:

‘The risks of continuing a ‘wait-and see’ approach for a few more months are comparably low. The global forces pushing inflation up are largely beyond the ability of monetary policy to influence, and there is little evidence of inflation expectations among the public breaking out.’

‘Meanwhile, tightening policy when other major central banks are still in loosening mode would seem incongruous, particularly when the UK economy was more affected by the pandemic than the US and the Eurozone.’

GBP/AUD Exchange Rate Forecast: AUD to Strike Higher on Upbeat PMI?

While Australia’s finalised services PMI is unlikely to differ from early estimates, confirmation of a rise in Australian service-sector activity could still boost the ‘Aussie’, further extending GBP/AUD’s downturn.

Later in the week, the Pound Australian Dollar exchange rate is likely to be influenced by Australia’s trade balance, in addition to the Bank of England’s interest rate decision. Hawkish messaging from the central bank may support Sterling, boosting GBP/AUD.

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