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Pound Australian Dollar (GBP/AUD) Exchange Rate Narrows amid Downbeat Market Mood

May 10, 2023 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Exchange Rate Narrows amid Downbeat Market Mood

The Pound Australian Dollar (GBP/AUD) exchange rate traded in narrow boundaries during Wednesday’s European session, as a bearish market mood sapped sentiment towards both currencies.

At the time of writing, GBP/AUD traded at around AU$1.8675, showing little movement from Wednesday’s opening rates.

Pound (GBP) Buoyed by Rate Hike Bets

The Pound (GBP) was propped up on Wednesday by elevated interest rate hike bets. Thursday brings the release of the Bank of England’s (BoE) latest interest rate decision. Markets have priced in a 25bps hike, and as such any accompanying forward guidance is likely to be the driver of movement.

Previously, the BoE shied away from clear forward guidance which brought turbulence to GBP rates. If the bank continues with this direction, Sterling may weaken.

However, if they opt for more hawkish forward guidance, GBP may rally as investors anticipate additional tightening in the future. Markets are anticipating this direction, as inflation currently sits at 10.1% - over five times the BoE’s target rate.

Market Analysts at the Royal Bank of Canada commented: ‘Previously we had seen the MPC holding Bank Rate at 4.25% but the April labour market and March CPI inflation data were too much to ignore. As part of keeping its options open, we think the MPC will avoid any reference, explicit or otherwise, to pausing its tightening cycle. Instead, we expect it to retain an overall tightening bias.’

Elsewhere, the tepid market mood seen in Wednesday’s European session may have dented sentiment towards Sterling. As GBP holds an increasingly risk sensitive nature, downbeat market mood shifts can prevent it from gaining much ground.

Australian Dollar (AUD) Undermined by Bearish Market Mood

The Australian Dollar (AUD) edged lower during Wednesday’s session, as a risk averse market mood sapped sentiment towards the risk sensitive currency.

Investors appeared concerned ahead of the afternoon’s American consumer price index release. With inflation appearing to become a severe issue in the world’s largest economy, the prospect of further tightening from the Federal Reserve is prompting concerns over global economic growth potential.

Therefore, the market mood appeared to be tepid at best. As a risk sensitive currency, the Australian Dollar was unable to gain much ground.

However, persistent bets on further tightening from the Reserve Bank of Australia (RBA) may have underpinned the ‘Aussie’. With inflation remaining far above the RBA’s target, there appeared to be room for additional tightening.

Elsewhere, recent price caps introduced on Coal may have further weighed on the ‘Aussie’. The Australian Government recently introduced a AU$125 per tonne cap, which sent prices diving.

The Department of the Treasury’s budget stated: ‘Treasury has extended the period over which prices return to their long-term anchors to better reflect ongoing price pressures associated with current market disruptions but this adjustment period remains highly conservative relative to market views to account for the downside risk of sharp price corrections.’

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: UK GDP Growth to Boost GBP?

Looking ahead for the Pound, the latest GDP data for the UK is due to print on Friday. On a quarterly basis, economists forecast growth of 0.1%.

If this prints accurately, GBP could rally as it would point to signs that the UK economy had managed to avoid weakening over the quarter, and may set the stage for the UK to avoid a recession.

For the Australian Dollar, Westpac are due to release their latest consumer confidence index overnight. A fall is currently expected by economists, which consumer sentiment weakening from 85.8 to 82.1 in May.

This points to waning consumer sentiment in Australia. With rate hikes from the Reserve Bank of Australia being seen as key causes of drops, the recent surprise hike could bring the index below estimates. Either way, this may weigh on the ‘Aussie’.

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