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Pound Australian Dollar (GBP/AUD) Exchange Rate Spikes Despite RBA Hike

November 7, 2023 - Written by Toni Johnson


The Pound Australian Dollar (GBP/AUD) exchange rate spiked to the best conversion in a week after the Reserve Bank of Australia (RBA) increased interest rates to 4.35% at the latest policy meeting, in line with consensus forecasts.

Despite a brief spike on the decision, the Australian currency declined sharply.

The Australian dollar to Dollar (AUD/USD) exchange rate slumped to 0.6420 from 0.6500 highs.

From lows at 1.8980, the Pound to Australian dollar (GBP/AUD) exchange rate jumped to weekly highs at 1.9185 before settling around 1.9155.

The accompanying policy statement dropped the reference that further tightening “may be required”. It was replaced by the statement that “whether” further tightening is required will depend on the data.

According to MUFG, it clearly signals that the RBA is less confident that further hikes will be needed in the current tightening cycle and brings it more into line with the thinking of other G10 central banks.

It added; “With the RBA now in data dependent mode, it will require more upside inflation surprises to prompt the RBA to hike further.”

Overall, MUFG is now more confident that interest rates have peaked.

Paul Bloxham, chief economist for Australia and New Zealand at HSBC, said: “We see the RBA as now in ‘calibration mode, we expect that a follow-up hike in December is unlikely.”

In its statement, the RBA expressed determination to tackle inflation; “If high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”

ING was surprised over the market reaction, especially as it considered that the statement was relatively hawkish and pointed to major uncertainties.

It added; “Although the RBA hike was expected by the majority of the forecast community, markets were not completely sold on the idea, which is why it is curious that the AUD weakened on the decision and that bond yields fell.”

ING also expressed concerns over inflation trends and pointed out that annualised inflation over the past two months was running around 7%.

In this context, it pointed to the risk that inflation doesn’t decline further and commented; “If it doesn't, then instead of the rate cuts that we expect could be on the radar by mid-2024, we might still be looking at some further tightening before we can call this rate cycle truly over.”

According to Commerzbank; “If the upcoming data points to continued stubborn inflation, a rate hike could be back on the agenda. Until then, however, the upside potential from the Australian side is likely to remain limited and much will depend on the movement of the USD.”

MUFG also pointed out that global developments will be important for the Australian currency.

In this context, Chinese economic developments will be important and the latest trade data raised fresh uncertainties.

Exports declined 6.4% in the year to October compared with expectations of a 3.3% decline. There was a 3.0% annual increase in imports compared with expectations of a 4.8% decline and the first annual increase for a year.

Zhou Hao, economist at Guotai Junan International commented; "The figures are in contrast to market expectations. The bad exports data may hit market confidence as we had expected the supply chain of exports to recover."

According to Julian Evans-Pritchard, head of China Economics at Capital Economics; "Measures of foreign orders hint at a more significant drop in foreign demand than what has so far been observed in the customs data."

MUFG expects global hurdles; “the external backdrop also remains challenging for the Australian dollar with global growth weak and likely to weaken further next year in response to tighter monetary policy. As a result, it will be difficult for the AUD/USD rate to raise back above the 200-moving average at just above the 0.6600-level in the near-term.”

TD Securities is more positive over the medium-term outlook; “Near term, we see AUD/USD returning to the 0.63-0.65 range. However, taking a longer-term view, we remain bullish on Aussie given our view that the USD correction has begun while the Chinese stimulus should begin to bear fruit.”
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