Against forecasts of another unanimous vote to leave UK interest rates frozen, policymaker Kristin Forbes broke ranks and voted for an increase, causing the Pound to rally from 1.59 to 1.61 against the Australian Dollar.
If the Pound is to remain positive against the Australian Dollar in the future, then incoming UK inflation figures could play a decisive role.
Forbes cited rising inflation as her reason for voting in favour of a rate hike, as the BoE minutes showed;
‘There are limits to the extent that above-target inflation can be tolerated. The continuing suitability of the current policy stance depends on the trade-off between above-target inflation and slack in the economy’.
This broadly means that if inflation continues exceeding the BoE target of 2% then the odds of a UK rate hike as a countermeasure also increase.
The first test of this arrangement will come on March 21st, when UK inflation figures for February are due. Previous annual inflation came in at 1.8%, which makes a rise to 2% a distinct possibility.
The fact that rising inflation could put pressure on the BoE to consider a rate hike may cause a GBP AUD exchange rate rally.
Future Australian Dollar movement is expected to be largely dependent on the Reserve Bank of Australia’s (RBA) response to the latest US interest rate hike.
Forecasts for an RBA rate hike in 2017 have been dramatically downgraded from around 50% to 24% in light of the US adjustment.
However, if Australian unemployment drops considerably in the future, the odds of an RBA rate hike this year could rise again, which would have a knock-on positive effect for the Australian Dollar.
Recent GBP AUD Interbank Exchange Rates
At the time of writing, the Pound to Australian Dollar (GBP AUD) exchange rate was trading at 1.61 and the Australian Dollar to Pound (AUD GBP) exchange rate was trading at 0.62.