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Pound Australian Dollar GBP/AUD Exchange Rate to Firm on UK CPI?

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GBP/AUD Exchange Rate Gains on Brexit Hopes and BoE Expectations

The Pound Australian Dollar (GBP/AUD) exchange rate strengthened today as the UK and the EU began new Brexit negotiations to resolve their disagreements over the Northern Ireland protocol.

Expectations of a Bank of England (BoE) rate hike are also supporting Sterling, with traders pricing in a 72.4% chance of the bank raising rates at its December 2021 meeting, up from 45.6% a week ago.

Pound (GBP) to Climb Higher on Strong Inflation?

With speculation about when the BoE will tighten monetary policy growing in recent weeks, GBP investors will be eagerly awaiting the UK’s latest CPI data, which is due out on Wednesday.

UK inflation is forecast to have held at 3.2% in September – its highest level since March 2012. However, August’s reading overshot forecasts; could the latest CPI also print higher than expected?

If so, this could give the Pound a significant boost. Rhetoric from BoE policymakers in recent weeks shows that they are increasingly concerned about rising inflationary pressures. The bank’s new Chief Economist, Huw Pill, warned last week that UK inflation could persist for longer than initially anticipated.

As such, a high inflation reading will further increase the likelihood of a December rate hike, thereby potentially boosting GBP/AUD.

Optimism from the RBA Could Support the Australian Dollar (AUD)

Australian Dollar (AUD) investors will also be focusing on central bank policy early next week, as the minutes from the Reserve Bank of Australia’s (RBA) October policy meeting are to be published on Tuesday.

While the RBA has said it does not expect to raise interest rates until 2024, optimism about the Australian economy’s ability to bounce back has supported AUD following previous announcements from the bank.

Earlier this week, the International Monetary Fund (IMF) published its latest World Economic Outlook, which presented a mixed picture for the Australian economy.

While the Delta coronavirus variant seems to have hit Australia’s economy harder than any other OECD nation, there was a silver lining. The IMF has upgraded its 2022 growth projection for Australia by almost more than any other major economy.

It will be interesting to hear the RBA’s take on both Australia’s current economic situation and its forecasts for the coming year. Cautious optimism from the central bank could support the ‘Aussie’, potentially limiting GBP/AUD gains.

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