Pound Australian Dollar Exchange Rate News: GBP/AUD Softened amid Bleak BoE Economic Outlook

August 8, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate News: GBP/AUD Softened amid Bleak BoE Economic Outlook

Pound (GBP) Plunged on Downbeat Forecast

The Pound (GBP) failed to drum up support as a lack of data left Sterling exposed to the souring market sentiment. After the Bank of England’s (BoE) downbeat economic report following their 50bps rate hike continued to weigh on the Pound.

Expectations of a recession are growing, compounded by the central bank’s forecast that the UK economy is headed for a recession that is likely to last five quarters. Ahead of the looming energy cap rise, inflation is expected to hit 13% by October, exacerbating the cost-of-living crisis.

The CEBR (Centre for Economics and Business Research) has released a concerning report that shows the growing divide within the UK labour market. The report reveals that high earners enjoy annual pay growths of 10%, compared to lowest earners who only see a 1% rise. Nina Skero, Chief Executive of CEBR, warns that the lowest 10% of earners are falling behind soaring inflation. She said:

‘Two prevalent yet opposing narratives have emerged. One focuses on the significant bargaining power held by employees as they take advantage of the tight labour market to negotiate record pay rises and generous bonuses.

‘The other points to the decline in wages once inflation is taken into account, and provides abundant anecdotal evidence of people in work struggling to make ends meet.’

Elsewhere, the political turbulence that has been unrelenting, continues to weigh on the Pound. Frontrunner for the Conservative leadership Liz Truss has once again received backlash for another proposed fiscal policy. In an interview, Truss ruled out one-off stimulus payments or benefits in a bid to assist people with energy bills this year:

‘Of course I will look at what more can be done. But the way I would do things is in a Conservative way of lowering the tax burden, not giving out handouts.’

Truss’ latest comments have been met with fierce criticism once again as the number of vulnerable families will face poverty and will need urgent financial support. Truss’ rival in the leadership race Rishi Sunak has openly opposed Truss’ fiscal policies and as such, the ongoing divide within the Tory party highlights the political uncertainty deterring investors.

Australian Dollar (AUD) Buoyed on Positive Risk Tone

The Australian Dollar (AUD) gathered moderate strength amid positive Chinese trade balance data and a turn in risk sentiment.
Providing modest support to the China-proxy Australian Dollar is the widening of China’s trade surplus to $101.26Bn in July, surging from June’s $97.94. On an annual basis, exports rose by 18%, far surpassing market estimates.

However, headwinds loom as fears of a global recession continued to linger in the background. After the US House Representative Speaker Nancy Pelosi visited Taiwan provoked a Chinese backlash, global risk sentiment wavered. China’s Foreign Ministry announced sanctions against Pelosi and, potentially damaging the already fragile US-Sino relations.

Also providing downward pressures on the ‘Aussie’ is the troubling news out of Hainan island in China, where Covid infections are once again on the rise. The province has seen several major cities being locked down, and with the country’s strict zero-Covid policy, further outbreaks threaten to slow the economy down once again.
If the world’s second largest economy was to half manufacturing, then the domino effect could intensify recession fears, likely to weigh heavily on the Australian Dollar.

GBP/AUD Exchange Rate Forecast: Global Risk Sentiment to Weigh Further?

A lack of major data in the first half of the week could see the Pound Australian Dollar exchange rate waver as it is left open to market sentiment. The ‘Aussie’ will likely be influenced by the developing situations out of China.

Meanwhile, ongoing political uncertainty combined with soaring inflationary pressures will keep a lid on the Pound as investors await a potentially downbeat GDP growth data on Friday.

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