Pound Australian Dollar Exchange Rate News: GBP/AUD Surged to Three-Week High amid Dovish Turn from RBA

August 2, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate News: GBP/AUD Surged to Three-Week High amid Dovish Turn from RBA

Australian Dollar (AUD) Tumbled amid Dovish Turn from RBA

The Australian Dollar (AUD) plummeted despite the Reserve Bank of Australia (RBA) delivering the third straight 50bps interest rate hike at its latest policy meeting. Souring the market mood was the dovish turn from the RBA emanating from their monetary policy statement.

The fourth rate hike in a row is the central bank’s fastest tightening action in almost three decades as it battles raging inflation. Despite many market analysts expecting the bold hike, a change in language in the follow-up policy statement exerted heavy downward pressure on the ‘Aussie’.

The RBA reaffirmed their stance on doing whatever is necessary to bring inflation down to target rates of 2-3% but is wary of the volatile global economic landscape. With the Ukraine war weighing on energy and commodities, China’s zero-Covid policy impacting supply chains, the RBA is reluctant to raise rates too quickly at the cost of the Australian economy.

RBA Governor Philip Lowe also warned that the Australian economy would slow this year and the subsequent years, with further hints of reduced rate hikes. Lowe said:

‘Today’s increase in interest rates is a further step in the normalisation of monetary conditions in Australia.

‘The increase in interest rates over recent months has been required to bring inflation back to (the 2-3%) target and to create a more sustainable balance of demand and supply in the Australian economy.

‘The Board expects to take further steps in the process of normalising monetary conditions over the months ahead.’

Pound (GBP) Softens amid Worsening Economic Outlook

The Pound (GBP) fell against most of its peers amid a myriad of political and social volatility continues to weigh on Sterling.

Political uncertainty continued to exert pressure on Sterling as the race for the UK and Conservative leadership continues to sow division within the Tory party. Liz Truss has U-turned on her controversial pay-cut plan as criticisms have been drawn from both the Conservative party and opposition.

Truss initially proposed an £8.8Bn savings package, as she suggested regional pay boards outside of London. After the initial announcement, Sunak’s campaign responded that the savings could only come from pay cuts across the entire public sector, including nurses, teachers, and the armed forces. Continued misguided fiscal policies will likely to weigh on the Pound as investors remain cautious as to how either candidate could navigate the UK’s economy out of such desperate times.

Meanwhile, escalating geopolitical tensions are weighing on global risk sentiment as US House of Representatives Speaker Nancy Pelosi has riled China with her proposed visit to Taiwan. Chinese Foreign Ministry spokesperson Zhao Lijian warned against the US delegates visit to Taipei:

‘We would like to tell the US once again that China is standing by, and the Chinese People's Liberation Army will never sit idly by. China will take resolute responses and strong countermeasures to defend its sovereignty and territorial integrity.’

‘As for what measures, if she dares to go, then let's wait and see.’

GBP/AUD Exchange Rate Forecast: Key Australian Data to Weigh Further on the ‘Aussie’?

With data remaining thin on the ground for the Pound Australian Dollar, all eyes will be on a flurry of Australian data. Services PMI and retail sales are due to print, and with forecasts expecting a fall in both, the ‘Aussie’ could slide further.

Meanwhile, the Bank of England (BoE) is set to raise their interest rates to 1.75% at their next policy meeting on Thursday. If the central bank continues their hawkish policy on reining in inflation, the Pound could see a boost.

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TAGS: Pound Australian Dollar Forecasts