Pound Australian Dollar (GBP/AUD) Exchange Rate Slides as UK Recession Confirmed

November 8, 2022 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Slides as UK Recession Confirmed

Pound Australian Dollar (GBP/AUD) Exchange Rate Drops as BoE Confirms UK Recession.

The Pound Australian Dollar (GBP/AUD) exchange rate dropped sharply on Tuesday, as Bank of England (BoE) confirmed that the UK had entered a recession.

The gloomy news prompted GBP/AUD to fall to around AU$1.7665 at the time of writing, a drop of roughly 0.7% from Tuesday’s opening rates.

Pound (GBP) Reels from Recession Confirmation

The Pound (GBP) fell against most peers on Tuesday, as investors digested the news that the UK had entered a prolonged economic recession.

Following comments from last Thursday from the Bank of England (BoE) which predicted that the UK had already entered a recession, analysts have discussed the extent of the UK’s recession.

With investors looking ahead to Friday’s incoming Q3 GDP data release for the UK, the caution and gloom around the UK economy has kept investors at bay.

Sanjay Raja, the Deutsche Bank’s Chief UK Economist predicted: ‘The drop in Q3 GDP reflects continued weakness in household and business confidence, higher inflation, and higher interest rates in the economy, with household consumption contracting in the quarter, business investment slowing, and government spending falling further. We also expect to see a material softening in inventories after two consecutive quarters of historically strong stockpiling, which should push GDP firmly into negative territory.’

However, BoE Chief Economist Huw Pill committed to further interest rate hikes by reiterating the Bank’s desire to bring inflation down to their target of 2%. These comments may have served to cushion GBP somewhat.

Australian Dollar (AUD) Supported by Buoyant Business Activity

Tuesday saw the Australian Dollar (AUD) boosted by optimistic business activity, allowing the ‘Aussie’ to counteract a risk-sensitive market mood.

The risk-sensitive currency managed these gains despite other data releases painting a negative picture for the Australian economy, with business confidence slipping to a flat zero and consumer confidence falling far below forecasts.

As such, while AUD was able to make gains on Tuesday, the dour outlook prevented the ‘Aussie’ from making serious ground by placing a cap upon the currency.

NAB Chief Economist Alan Oster expanded upon how the data impacted the economic outlook for Australia. He stated: ‘Consumers continue to spend despite headwinds from inflation and interest rates, and that run of strength looks to have carried on into October. Overall, the survey suggests that firms are growing wary of the potential for a slower period ahead, despite ongoing strong demand. Strong price growth in October reinforces our expectation that inflation will continue to rise strongly through Q4. Retail price growth was higher again in October, signalling that goods-side inflation remains a key challenge.’

Elsewhere, an increase in covid cases in China likely weighed upon the ‘Aussie’, due to it’s nature as a Chinese proxy-currency.

Pound Australian Dollar Exchange Rate Forecast: Dovish BoE to Push Pound Lower?

Looking ahead for the Pound, the BoE policymaker Silvana Tenreyro is scheduled to speak. If she continues to strike a dovish tone, or adds to the BoE’s downbeat economic forecasts for the UK, Sterling may fall lower.

Further adding to the BoE’s signalling of a recession may be Friday’s GDP release. With September and Q3’s data expected to show a contraction, recession fears may be stoked.

For the Australian Dollar (AUD), Thursday brings the publication of consumer inflation expectations. With a modest dip from 5.4% to 5.1% forecast, AUD may be boosted by the positive news.

The Reserve Bank of Australia’s Deputy Governor Michele Bullock is scheduled to speak on Wednesday. If she strikes a hawkish tone, AUD may be further strengthened.

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