Pound Australian Dollar Exchange Rate News: GBP/AUD Rallied as BoE Reassurances amid Banking Sector Turmoil

March 20, 2023 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate News: GBP/AUD Rallied as BoE Reassurances amid Banking Sector Turmoil

Pound (GBP) Supported by Strength of UK Banking System

The Pound (GBP) managed to shrug off mounting financial sector fears and climbed against most of its peers on Monday. Despite the buyout of Credit Suisse by UBS failing to cheer the markets, Sterling found strength as the Bank of England (BoE) reassured investors.

Bank shares plummeted in the wake of the rescue deal, as more than £14bn worth of bonds were wiped out. Neil Wilson, Chief Market Analyst at Markets.com, said of the situation:

‘Blatantly upending the hierarchy of debt will have ramifications and I think this is why we are seeing such a negative reaction in bank shares this morning.’

Meanwhile, major central banks coordinated late last night with the Federal Reserve to ensure liquidity in the form of US Dollars to prevent any further collapses. But the market was still spooked, and the BoE stepping in to calm nervous GBP investors:

‘We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation. The UK banking system is well capitalised and funded and remains safe and sound.’

However, keeping a lid on any further significant gains for Sterling is the growing possibility of a pause in the interest rate hike cycle. With the turmoil in the financial sector, and worries of further damage due to sky-high interest rates, the BoE might be forced to pause. Money markets have now priced in a 57% chance of a pause from the central bank at this Thursday’s policy meeting.

Australian Dollar (AUD) Undermined by Waning Market Sentiment

Meanwhile, the Australian Dollar (AUD) struggled for demand on Monday as a worsening market mood hit the risk-sensitive ‘Aussie’. Ongoing fears of further collapses in the banking sector continue to weigh heavily.

Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent attempted to allay fears as he spoke over the weekend:

‘Volatility in Australian financial markets has picked up but markets are still functioning and, most importantly, Australian banks are unquestionably strong – the banks’ capital and liquidity positions are well above regulatory requirements.’

But with both the Fed and BoE interest rate decisions this week, the banking sector could come under increased pressure, potentially keeping the Australia Dollar muted.

GBP/AUD Exchange Rate Forecast: RBA Minutes to Boost the Aussie?

Looking ahead, the Pound Australian Dollar exchange rate could see further movement with the release of the RBA’s minutes from the last policy meeting. The minutes could reveal how the RBA intends to continue battle inflation, and a hawkish rhetoric could lift the ‘Aussie’.

Meanwhile, the Pound could see demand sap if the likelihood of a pause in the tightening cycle grows. With the latest inflation reading on Wednesday, followed by the interest rate decision on Thursday, Sterling could slip if the BoE turns dovish.

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TAGS: Pound Australian Dollar Forecasts