Pound Australian Dollar Exchange Rate News: GBP/AUD Plunged on Concerns Over Fiscal Policy Ramifications

September 7, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate News: GBP/AUD Plunged on Concerns Over Fiscal Policy Ramifications

Pound (GBP) Downbeat on Inflationary Impact of Energy Plans

The Pound (GBP) came under renewed pressure after Bank of England (BoE) policymakers appeared cautious and somewhat guarded in their speech to parliament.

Ahead of new Prime Minister Liz Truss’ announcement of the much-needed financial support, concerns are growing of how the UK will pay for it. Reports of energy bills for households being frozen for 18 months would bring a much-needed reprieve for millions of households. Truss has previously ruled out windfall taxes to pay for it, opting for cutting taxes instead.

Investors are concerned as to how the financial support will be paid for, with the long-term impact on the UK economy at the forefront of their fears. At the Treasury meeting, the BoE governor Andrew Bailey seemingly avoided the question of whether the pending energy bills package could be inflationary. Bailey added:

‘I think there's just too much uncertainty to have a strong view right now, given the lack of details.

‘It's not for us to comment on what fiscal policy will be and we will wait and see what it is... but I do very much welcome the fact that there will be, as I understand it, announcements this week because I think that will help to, in a sense, frame policy and that's important.’

Huw Pill, BoE Chief Economist did not dismiss Goldman Sachs forecast of UK inflation hitting 22%, but just fell short of endorsing it. In the wake of cautious remarks, the odds for a 75bps rate hike have dropped significantly. Wednesday saw a 71% chance of a bold rise, but now falls to 55%.

Australian Dollar (AUD) Wavered on Downbeat Domestic and Chinese Data

The Australian Dollar (AUD) found moderate strength against some of its peers on Wednesday despite the printing of poor Chinese data, as well as mixed domestic data.

Australian GDP growth data revealed a modestly worse-than-expected increase in QoQ growth as it printed at 0.9% versus an expected 1%. Despite this, it marked the third consecutive month of growth amid the first full quarter since borders reopened. However, on a yearly basis, GDP grew 3.6% compared to last year, compared to an expected 3.5%.

However, Chinese balance of trade saw an unexpected fall in trade surplus. Plummeting to a three-month low of $79.39bn, a myriad of issues played their part in seeing a softer rise in exports. Surging Covid cases, searing heatwaves, and waning foreign demand have seen a considerable drop in China’s key exports.

GBP/AUD Exchange Rate Forecast: Energy Bill Bailout Plan to Prove Costly in Long-Run?

Looking ahead, all eyes will be on the announcement of Truss’ fiscal policies on how she intends to tackle the energy bill crisis. With details of the plan set to be revealed on Thursday, investors will be keen on how the UK government intends to find the financial support.

Elsewhere, Australia’s trade surplus figures will be released tomorrow, and an expected drop from the previous month’s record high could weigh on the ‘Aussie’. But with China’s latest economic concerns, a softening of exports to Australia’s biggest trade partner could see the ‘Aussie’ slide.

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