Despite a lack of market reasons to buy the risky Australian Dollar, the British Pound to Australian Dollar (GBP/AUD) exchange rate failed its advance attempts on Wednesday. This was because disappointing UK inflation results indicated that Britain’s economy may not be able to sustain tighter monetary policy from the Bank of England (BoE) any time soon.
After a narrow slip from 1.7951 to 1.7928 last week, GBP/AUD has seen a more sharp drop since markets opened on Monday. GBP/AUD fell over a cent on Monday alone, and on Wednesday the pair hit a low of 1.7659. This was the lowest GBP/AUD level in over two months – since March.
Pound (GBP) Recovery Attempt Fizzles Out Following Poor UK Inflation Results
On Tuesday, multiple policymakers from the Bank of England (BoE) expressed confidence in Britain’s economic outlook, despite some recent misses in major ecostats.
One BoE policymaker, Gertjan Vlieghe, even saw the bank on a path to hike UK interest rates once or twice a year for the next three years.
This briefly gave the Pound a chance at recovery, after UK economic and Brexit concerns have dragged it lower in recent weeks.
However, on Wednesday Britain’s latest Consumer Price Index (CPI) report was published and indicated that Britain’s price pressures were even weaker than expected.
UK inflation was forecast to have improved from 0.1% to 0.5% month-on-month, and have remained at 2.5% year-on-year. However, the figures only came in at 0.4% and 2.4% respectively.
The core inflation print was even more concerning, showing that underlying inflation had slipped from 2.3% to 2.1% year-on-year rather than the predicted 2.2%.
While inflation remains above the Bank of England’s target rate, analysts are unsure about the case for a BoE interest rate hike later in the year. According to Professor Costas Milas from the University of Liverpool:
‘The 2.4% CPI inflation reading for April is already (slightly) lower than the most likely outcome (the so called ‘mode’) of 2.43% predicted for the second quarter of 2018 by the MPC’s Inflation Report only a few weeks earlier.
If CPI inflation falls further in May, they will most likely have to revise their inflation forecasts downwards which will obviously make the case for an August interest rate hike even weaker.’
Australian Dollar (AUD) Kept Afloat by Weak Pound and Lingering Risk-Sentiment
The Australian Dollar was able to push GBP/AUD down to a new two-month-low thanks to the Pound’s weakness, but demand for the Australian Dollar itself is not particularly strong.
The currency has been driven largely by movement in rivals and global geopolitical and trade factors.
For example, it briefly saw a surge in demand on Monday following reports that the US and China were happy with how trade negotiations had gone so far.
As trade war jitters faded, investors found risky commodity-correlated currencies like the Australian Dollar more appealing.
However, on Tuesday night US President Donald Trump noted that he was not satisfied with negotiations so far, which rekindled trade war concerns and helped GBP/AUD to briefly recover.
Still, overall the Pound’s weakness and solid prices of commodities like iron ore in recent sessions helped the Australian Dollar to hold its ground.
GBP/AUD Forecast: Could UK Retail Sales Help BoE Bets Recover?
Bank of England (BoE) interest rate hike bets slumped following Britain’s April inflation report, but could other UK data make investors more confident in the chances of a BoE rate hike again?
Thursday will see the publication of Britain’s April retail sales results, which are forecast to have improved slightly month-on-month but have slowed notably year-on-year.
If UK retail sales beat expectations, it could add credence to BoE forecasts. Bank policymakers have argued that consumer confidence will improve as wages improve and believe that the Q1 slowdown in consumer activity was caused by poor weather.
As a result, this may boost hopes that inflation will improve and bets of an August BoE rate hike could rise. This would make the Pound more appealing towards the end of the week.
Amid a lack of notable Australian data due for publication, Pound strength is most likely to drive GBP/AUD movement.
If the Pound begins to strengthen even slightly, it could help GBP/AUD to mount a recovery towards the end of the week – especially if ‘Aussie’ trade remains pressured by trade war jitters.