Pound Australian Dollar Exchange Rate News: GBP/AUD Strengthened on Less-Hawkish RBA Minutes

March 21, 2023 - Written by John Cameron

STORY LINK Pound Australian Dollar Exchange Rate News: GBP/AUD Strengthened on Less-Hawkish RBA Minutes

Australian Dollar (AUD) Weakened amid a Cautious RBA

The Australian Dollar (AUD) came under increased selling pressure on Tuesday after the minutes from the Reserve Bank of Australia’s (RBA) last policy meeting were released. The minutes revealed that the RBA adopted a more cautious approach to monetary policy and considered a pause.

With the RBA taking a more dovish turn than expected, the Australian Dollar nosedived in the immediate aftermath of the release. The minutes revealed there was only the option of a 25bps rise, and not a 50bps option as expected. They added:

‘Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy.’

However, the Board also noted that further tightening will be required to tame inflation, as it remains far too high. With the labour market remaining tight, and the Australian economy resilient, the RBA will be closely monitoring employment, retail, and ongoing developments in the global economy to gauge policy decisions. In light of the recent jobs report, UOB Economist Lee Sue Ann, commented on the data:

‘The latest jobs data underscores the economy’s resilience, with labour market strength a key factor in the Reserve Bank of Australia (RBA)’s confidence that the economy can avoid a recession despite the aggressive monetary tightening cycle. The RBA expects unemployment to hold around 3.5%-3.6% through mid-2023.’

However, a moderate recovery in risk sentiment helped limit losses and buoyed the risk-sensitive ‘Aussie’. With fears of a banking contagion seemingly receding, US Treasury Secretary Janet Yellen reassured the markets further. By stating that the US government is willing to provide further support, investors appeared to have cheered the news and risk-averse mood returned.

Pound (GBP) Undermined by Rate Hike Pause

The Pound (GBP) found some strong support on Tuesday amid a significant improvement in global market sentiment. A surge in government borrowing could have kept a lid on any further significant gains for Sterling.

Public sector borrowing, excluding banks, soared to the highest February on record as it reached £16.7bn. Far above expectations of £11.4bn, the figure takes the national debt to its highest level in almost 60 years. With energy prices still sky-high, the UK government’s energy support scheme for homes and businesses drove lending figures up. Ruth Gregory, Deputy Chief Economist at Capital Economics, warned of how the surge in borrowing could impact the UK going forward:

‘The big risk is that a further escalation in the banking crisis causes a deterioration in the fiscal outlook as the hit to the public finances from weaker economic growth is only partially cushioned by lower gilt [UK government bond] yields.’

Meanwhile, despite expectations of the BoE holding the interest rate at 4%, a 25bps rate hike could still on the table. Amid the turbulence of the banking sector, the reassurances of both the central bank and the UK government in the strength and resilience of the UK banking system, could mean the BoE could stick to their tightening cycle. ING analysts said of the situation:

‘A calmer financial market backdrop would keep a 25bp hike on the table. Further volatility could easily see a “no change” decision.’

GBP/AUD Exchange Rate Forecast: UK Inflation to Lift Rate Hike Bets?

Looking ahead, the Pound Australian Dollar exchange rate could see further movement with the latest CPI headline inflation reading for the UK. A modest easing to 9.9% from 10.1% will hardly cheer investors, or the UK, but any surprise could weigh on the BoE’s interest rate decision on Thursday.

Meanwhile, the Australian Dollar could see further movement with the Federal Reserve interest rate decision on Wednesday. If the Fed opts to continue its aggressive rate hiking cycle, the risk-sensitive ‘Aussie’ could tumble on a sliding market mood.

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