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Pound Australian Dollar Exchange Rate Climbs as UK Inflation Jumps

November 17, 2021 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Buoyed as UK Inflation Soars

The Pound Australian Dollar (GBP/AUD) exchange rate is strengthening on Wednesday after making solid gains on Tuesday.

Soaring UK inflation has led some investors to price in expectations for a rate hike from the Bank of England (BoE) at its December policy meeting.

GBP/AUD has rebounded from AU$1.82 on Monday to trade at AU$1.8448 at the time of writing.

Pound (GBP) Strengthens on BoE Rate Hike Bets

The Pound (GBP) is building on Tuesday’s gains today after UK inflation jumped more than expected to its highest level in a decade.

Headline inflation in the UK rose to 4.2% in October, above forecast of 3.9% and much higher than September’s 3.1%.

Grant Fitzner, chief economist at the Office for National Statistics, commented on the data:

”Inflation rose steeply in October to its highest rate in nearly a decade.

“This was driven by increased household energy bills due to the price cap hike, a rise in the cost of second-hand cars and fuel as well as higher prices in restaurants and hotels.

“Costs of goods produced by factories and the price of raw materials have also risen substantially and are now at their highest rates for at least 10 years."

Excluding more volatile items such as food and energy, core inflation also rose more-than-forecast to 3.4% in October, up from 2.9% in September.

Combined with upbeat UK jobs data yesterday that revealed unemployment fell to 4.3% from 4.5%, and that the number of employees on payrolls is up 160,000 in October despite the end of the furlough scheme, the pressure for the BoE to raise interest rates looks to be increasing.

BoE policymaker comments have often centred on the UK employment market recovering and the impact of the furlough scheme ending, which on early data, looks to be minimal.

However, Sterling’s gains appear to have been limited as investors hold bets due policymakers having previously reiterated their views that the forces driving inflation higher, such as energy prices, are transitory.

In addition, signs of tightness in the labour market with vacancies soaring and inflation not yet appearing to have become entrenched in wage growth may suggest that the BoE could continue to leave rates unchanged at its December policy meeting.

Australian Dollar (AUD) Extends Losses on RBA Stance

The Australian Dollar (AUD) is continuing to weaken again today after yesterday’s Reserve Bank of Australia (RBA) driven losses.

RBA Governor Philip Lowe reiterated the central bank’s stance that inflationary pressure did ‘not warrant an increase in the cash rate in 2022’, commenting:

“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year.”

Lowe’s push back against aggressive market pricing for an interest rate hike in 2022 weighed on the Australian Dollar, pushing it lower.

Australia’s latest wage price index released overnight appears to have had little impact on influencing bets that the RBA may alter its policy stance, as the figures met expectations of a 2.2% year-on-year increase, up from 1.7% in the second quarter.

Pound Australian Dollar Forecast: UK Retail Sales in Focus

The GBP/AUD exchange rate may continue to make gains in the coming days as investors bet on a widening policy gap between the BoE and the RBA.

With the latest UK jobs and inflation data suggesting to some investors that the BoE may be more likely to raise interest rates in December, while the RBA maintains loose monetary policy, GBP/AUD may extend its gains.

UK retail sales data published on Friday may also support the Pound, with 0.5% growth forecast after five consecutive months of contraction.

In the absence of notable AUD data releases, the Australian Dollar looks set to be driven by market risk appetite and the policy stances of major central banks.

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