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Pound to Australian Dollar Rate Posts 2-Week Highs above 1.92 on RBA Hold

December 6, 2023 - Written by David Woodsmith

Australian Dollar Dips as Reserve Bank of Australia Holds Rates at 4.35%, GBP/AUD Posts 2-Week Highs above 1.92

The Australian dollar dipped after the Reserve Bank of Australia (RBA) decision with the Australian dollar to US dollar (AUD/USD) exchange rate dipping to below 0.6600 and trading around 0.6580.

The Pound to Australian dollar (GBP/AUD) exchange rate jumped to 2-week highs at 1.9220 before settling just above 1.9200.

The RBA held interest rates at 4.35% at the latest meeting. This was in line with consensus forecasts and maintained rates at a 12-year high.

According to the statement; “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and evolving assessment of risks”.

According to RBA Governor Bullock; "Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market."

Barclays commented; "The statement, in our view, was less hawkish than November's and also less hawkish than we expected,"

It added; "We continue to think the hiking cycle is over, though we do note the bank's data dependent approach means the possibility of another hike after the Q4 inflation print."

The inflation data will be released in late January ahead of the February 6th policy meeting.

The RBA will not hold a policy meeting in January.

According to MUFG; “It leaves the RBA in data dependency mode when setting policy, and their bias to hike rates further appears to be softening further.”

It added; “Still in contrast to other G10 central banks, the RBA is expected to be the least active in cutting rates next year with only 25bps of cuts priced in by the end of next year. Short-term yield spreads have been moving in favour of the Australian dollar since the middle of October.”

It expects overall yield spreads will support the Australian currency.

MUFG expects AUD/USD will strengthen to 0.7000 at the end of 2024.

ANZ economist Madeline Dunk commented; "I think their hope would be that the November hike has stamped out some of those inflation concerns at least in the short term. And really the global story too probably works in their favour."

She added; "If we see a continuing momentum over there (Fed rate cuts), it does support the case that they can be done at 4.35%. But I think they would want to keep the option open just in case."

Markets will also be monitoring the Chinese. The Caixin services PMI index strengthened to 51.5 for November from 50.4 previously and above expectations of 50.8.

The Chinese data should provide some support to the Australian currency.

ING considered that markets were likely positioned for a more hawkish statement after the minutes which sapped immediate support for the currency.

Nevertheless, ING added; “Still, we think that with the door remaining open for more hikes and the recent history suggesting quick reactiveness by the RBA to upward surprises in inflation, markets will remain tempted to keep some residual bets on tightening early in 2024.”

Matt Simpson, senior market analyst at City Index noted; "The Aussie has had a great run in recent weeks and was arguably overbought over the near-term."

He added; "So we may be seeing a combination of profit-taking following the fact of the RBA's hold, and the closure of pre-emptive bets that the RBA may have delivered a more hawkish statement."

The British Retail Consortium (BRC) reported that UK like-for-like retail sales volumes increased 2.7% in the year to November, unchanged from the previous reading and slightly above consensus forecasts of 2.5%.

The data is not adjusted for inflation and implied a significant decline in sales volumes.

According to Paul Martin, UK head of retail at accountants KPMG; "The cost-of-living crisis has taken its toll on Christmas spending for many households, and the continued economic conditions are testing consumer resilience."
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