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Pound Australian Dollar (GBP/AUD) Exchange Rate Climbs on Red Hot UK Core Inflation

May 24, 2023 - Written by John Cameron

Pound Australian Dollar (GBP/AUD) Exchange Rate Climbs on Red Hot UK Core Inflation

The Pound Australian Dollar (GBP/AUD) exchange rate soared on Wednesday, as a shock jump in UK core inflation prompted increased interest rate hike bets.

At the time of writing, GBP/AUD traded at around AU$1.8878, a rise of just under 0.6% from Wednesday’s morning rates.

Pound (GBP) Buoyed by Record High Core Inflation

The Pound (GBP) saw support on Wednesday, as markets continued to digest the latest UK consumer price index release.

Both sets of data surprised economists by printing far above forecasts. Headline inflation printed at 8.7%, a sharp fall from the previous months double digit figure but still above the forecast of 8.2%.

Core inflation was expected by economists to hold at 6.2%, but instead shocked markets by shooting up to 6.8%. Because of this, rate hike bets increased across investors, and additional tightening beyond a 25bps hike in June began to be entertained.

James Smith, developed Markets Economist at ING, stated: ‘UK inflation has come in higher than pretty much anyone, including members of the Bank of England's committee, expected in April. Headline inflation came in at 8.7%, higher than the 8.2% consensus. Core inflation picked up from 6.2% to 6.8%. This undoubtedly makes life harder for policymakers and no doubt raises the chance of yet another 25bp rate hike in June.’

With pressure mounting on the Bank of England (BoE), markets moved to price in another 75bps of interest rate hikes by September, as core inflation hit a 31 year high.

However, as Sterling holds an increasingly risk sensitive nature, the downbeat market mood on Wednesday may have served to place a lid on these gains. US debt ceiling talks appeared to have stalled, leading to sombre trade.

Australian Dollar (AUD) Weakens as Dovish RBNZ Undermines RBA

The Australian Dollar (AUD) weakened on Wednesday, as its close relationship with the New Zealand Dollar affected perceptions of it.

The Reserve Bank of New Zealand (RBNZ) published their expected 25bps interest rate hike, but signalled that the hiking cycle was now over. This shocked investors as they had expected further tightening to occur.

Adrian Orr, Governor of the RBNZ, stated: ‘It is quite nice to see some of the things we were hoping would already be here actually be here. And that is the lower surprise on GDP, the decline in inflation and all the indicators that suggest the interest-sensitive parts of the New Zealand economy are yielding.’

As such, this weighed heavily on the perception that the Reserve Bank of Australia (RBA) would continue to hike interest rates. The RBA appears to be in two minds over future interest rate rises, as the previous meeting minutes indicated it was a very close decision to hike rates.

Furthermore, as the ‘Aussie’ is particularly risk sensitive, Wednesday’s muted market mood likely contributed to the currency’s weak trade.

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

Looking ahead for the Pound (GBP), the core catalyst of movement is likely to come from Friday’s retail sales data release.

Reflecting sales across April, economists are forecasting a month on month increase of 0.3%. If this prints accurately, it may bring cheer to GBP investors by reflecting a recovery in the UK’s vital retail sector. However, recent prints have fallen below forecasts. If this occurs, the Pound would likely weaken.

Ahead of this, a lack of pertinent data releases may weigh on Sterling during Thursday’s session. As such, market dynamics may be the primary drivers of movement for GBP. If the market mood remains downbeat, the increasingly risk sensitive Pound could see its gains capped.

For the Australian Dollar (AUD), overnight on Thursday the latest retail sales data is forecast to print. While a 0.2% increase is forecast by economists, this would reflect a slow down in activity in the sector.

As such, if this prints accurately, the ‘Aussie’ may struggle for support amid signs that consumers are beginning to struggle with elevated interest rates and inflation.

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