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Pound Australian Dollar (GBP/AUD) Exchange Rate Slips as Investors Adjust BoE Rate Hike Bets

May 17, 2023 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Exchange Rate Slips as Investors Adjust BoE Rate Hike Bets

The Pound Australian Dollar (GBP/AUD) exchange rate weakened during Wednesday’s European session, as investors began to readjust their bets on further tightening from the Bank of England (BoE).

At the time of writing, GBP/AUD traded at around AU$1.8713, falling by just over 0.2% from Wednesday’s opening rates.

Pound (GBP) Dips as Investors Adjust BoE Rate Hike Bets

The Pound (GBP) weakened during Wednesday’s session, as investors began to readjust their bets on further interest rate hikes from the Bank of England.

Owing to data released on Tuesday, investors appeared less certain that the BoE would continue to hike interest rates in the near future. Unemployment in the UK unexpectedly increased to a 14 month high, while wage growth printed below forecasts.

Furthermore, PAYE employees fell by 136,000 for the first time since February 2021. Because of this, economists weighed that the UK’s labour market had begun to cool.

This may have been further reinforced by a speech from BoE Governor Andrew Bailey. In his speech, he reaffirmed the BoE’s commitment to curbing inflation. However, his language implied they were to take a data dependent approach.

Governor Bailey stated that: ‘I can assure you that the MPC will adjust Bank Rate as necessary to return inflation to target sustainably in the medium term, in line with its remit. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.’

However, the Pound’s losses may have been cushioned somewhat by a relatively upbeat market mood. As Sterling holds an increasingly risk sensitive nature, the cheery trade may have brought some tailwinds.

Australian Dollar (AUD) Supported by US Debt Ceiling Optimism

The Australian Dollar (AUD) enjoyed modest support during Wednesday’s early session, as optimism over negotiations around the US debt ceiling increased.

While US President Joe Biden left the talks to visit Japan on a scheduled trip, he promised to remain in close contact with the House of Representative leaders he had been speaking with.

Ongoing meetings between Biden and Speaker Kevin McCarthy appeared to end on a positive note on Tuesday, despite their relative brevity. Ending in under an hour, it appeared possible that a bipartisan agreement could be reached by the end of the week.

After the meeting, Biden commented that: ‘There’s still work to do but I made it clear to the speaker and others that we’ll speak regularly over the next several days and the staffs’ going to continue meeting daily to make sure we do not default.’

However, the deadline still looms over the market mood. Because of this, the risk sensitive Australian Dollar may have seen its gains capped during Wednesday’s session.

Furthermore, a lack of impactful data releases may have weighed on sentiment towards the ‘Aussie’, as investors had relatively little to go on.

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: AU Unemployment Data in Focus

Looking ahead for the Australian Dollar (AUD), Thursday brings the publication of a spate of labour data. The unemployment rate is likely to be the core catalyst of movement.

Economists currently forecast this to hold at 3.5%, which may indicate a tight Australian labour market. Because of this, there may be room for further tightening from the Reserve Bank of Australia, which may bring support to the ‘Aussie’.

However, with talks over the US debt ceiling remaining a focus, markets may remain in a sour mood. As such, the risk sensitive Australian Dollar could struggle for support in the short term.

For the Pound (GBP), data releases are thin on the ground in the short term. Because of this, Sterling may be vulnerable to shifts in market sentiment and other external influences.

If bearish trade persists, GBP could manage to climb above AUD. While Sterling does hold an increasingly risk sensitive side, the ‘Aussie’ is more susceptible to downbeat trade.

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