Pound Australian Dollar (GBP/AUD) Exchange Rate Drops amid Speculation of Mini-Budget U-Turns

October 14, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Drops amid Speculation of Mini-Budget U-Turns

Pound Australian Dollar (GBP/AUD) Exchange Rate Slips as Markets Cool as U-Turn Rumours Swirl

The Pound Australian Dollar (GBP/AUD) exchange rate slipped on Friday, as investors held back while waiting on an anticipated U-turn from the UK government regarding their ‘controversial’ mini-budget.

The GBP/AUD exchange rate traded at roughly AU$1.7887, a fall of around 0.4% from Friday’s opening rates.

Pound (GBP) Falters amid Renewed Political Chaos

Friday was nothing short of turbulent for the Pound (GBP), with a fresh set of political chaos weighing upon Sterling.

While UK government bonds continued to rally ahead of the Bank of England’s Friday deadline, the rumours of a government U-turn on the unfunded mini-budget served to keep investors cautious.

Chancellor Kwasi Kwarteng exited his talks with the International Monetary Fund a day early, flying back to the UK. As he landed, reports spread that Prime Minister Liz Truss would announce that she would scrap the corporation tax rise next year.

Further to this U-turn, other journalists reported that Chancellor Kwarteng was to be sacked as a press conference was scheduled.

Russ Mould, the investment director at AJ Bell, explored the rumours’ impact on the markets stating: ‘There was plenty of action in the UK as investors speculate about a potential government U-turn on tax cuts. That fact chancellor Kwasi Kwarteng is leaving his US trip early to return for crisis talks only stirs the speculation pot faster in terms of what might happen next. At this stage, the nation is asking if his tax cut plan or his job are toast, potentially both.’

UK political developments are likely to remain turbulent in the near future, with Truss and Kwarteng’s positions both seeming tenuous.

Australian Dollar (AUD) Buoyed by Risk-On Markets

Friday saw the Australian Dollar (AUD) enjoy buoyant trade, as a risk-on market mood served to prop up the risk-sensitive currency.

This continued from overnight trade on Thursday, which saw the global markets react to the optimistic developments in UK fiscal policy.

Additionally, the inflation rate readings from China aided the ‘Aussie’ due to the strong link the pairing shares. As the inflation rate came within the People’s Bank of China (PBoC)’s target rate, AUD benefited from the stability offered from China.

Furthermore, Australian consumer inflation expectations held at 5.4%, indicating a sense of optimism for the Australian economy which served to buoy the ‘Aussie’. This allowed the currency to continue to gain ground through trading sessions.

This followed from the Reserve Bank of Australia (RBA) taking a more upbeat tone towards inflation, as they demonstrated confidence in their approach.

This was expanded upon by RBA’s Assistant Governor Luci Ellis who stated in a speech on Wednesday: ‘As set out in our various communications over recent months, the Board’s objective is to get inflation back to target. What that implies for the policy rate depends on what else is going on. Some factors could be dragging on growth and inflation; others could be boosting them.’

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: U-Turn to Boost Sterling?

As investors will continue to keep a close eye on political developments in the UK, any changes will likely be the key catalysts of movement for the GBP/AUD exchange rate.
Should the rumours of Kwarteng’s sacking and Truss’ fiscal U-turns come true, GBP may strengthen across the board.

However, this will only come to pass if the U-turns are considered substantial enough. The markets are anticipating a complete reversal on Truss’ policy towards corporation tax, but if that doesn’t hold true Sterling may be weakened.

For the ‘Aussie’, risk appetite may remain the key factor. US Data is expect later on Friday, and should it display strong American retail sales, further Federal Reserve action may be even likelier. This could serve to dent the risk-sensitive AUD due to the negative-correlation shared with the ‘Greenback’.

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