Pound to Australian Dollar Exchange Rate Outlook Plunges on UK Inflation Slowdown
Fresh uncertainty on whether the Bank of England (BoE) will hike UK interest rates in May has caused the Pound to Australian Dollar (GBP/AUD) exchange rate to plummet so far this week.
After opening this week at the level of 1.8330, GBP/AUD climbed earlier in the week to touch a high of 1.8474. This was close to the pair’s 2018 high of 1.8485 seen last month.
However, on Wednesday GBP/AUD plunged as investors digested the latest UK inflation results. On Thursday the pair tumbled to a low of 1.8179 – the pair’s worst levels in almost a month.
British inflation fell well short of market expectations in most March prints, worsening concerns that the domestic inflation rate was not sustained enough to support tighter monetary policy in the coming year.
As a result, investors are now highly anticipating comments from the Bank of England to offer reassurance on whether or not it still plans to hike UK interest rates in May’s upcoming decision.
Pound (GBP) Exchange Rates Undermined by Inflation Rate Surprise
The Pound (GBP) had been seeing strong performance in April so far, due to seasonal trade as well as market expectations that the Bank of England (BoE) was preparing to hike UK interest rates in May.
However, a slightly underwhelming UK wage report on Tuesday and a surprisingly low UK inflation rate on Wednesday caused many investors to rethink the pace of the Bank of England’s monetary policy plans.
While analysts still generally expect the BoE will hike UK rates in May rather than go back on its signalling, there is still uncertainty about what the bank will do going forwards.
According to Neil Birrell from Premier Asset Management;
‘An increase in May is still very much on the cards, but the market will reduce its expectations further out,’
The Pound outlook is certainly lower now and Thursday’s UK retail sales results from March certainly didn’t help, as they also came in below forecasts in every print.
Australian Dollar (AUD) Exchange Rates Bolstered by Commodity News
Despite an underwhelming Australian job market report on Thursday, the Australian Dollar (AUD) continued to see strong performance during Thursday’s Asian session.
The risky commodity-correlated Australian Dollar has seen stronger demand in forex markets due to surging prices in major commodities, including prices of iron ore which is Australia’s most lucrative commodity.
Prices of iron ore advanced thanks to surging demand for other commodities, such as oil and other base metals.
Concerns about US-Russia tensions boosted demand for industry metals, while other metals rose due to US sanctions against aluminium producer United Co. Rusal.
Australia’s March job market results were underwhelming, with the employment change coming in at just 4.9k and the participation rate unexpectedly falling to 65.5%.
Pound to Australian Dollar (GBP/AUD) Forecast: Bank of England (BoE) in Focus
Sterling traders are highly anticipating developments from the Bank of England (BoE) before considering buying the British currency again.
With UK inflation slowing quicker than expected, the Pound outlook may be lower unless bank officials indicate that this data does not notably impact their outlook.
If the bank remains relatively hawkish despite slowing inflation, GBP/AUD could recover much of its losses and the long-term Pound outlook could improve again.
However, acknowledgement from the bank that the inflation slowdown limited its tightening outlook would likely leave the Pound weaker in the mid to long-term.
Bank of England Deputy Governor Jon Cunliffe will hold a speech on Thursday evening which could influence Pound movement if it surprises.
Even if the bank maintains a hawkish stance though, the Australian Dollar could prevent GBP/AUD from making a big recovery if commodity prices remain strong.
Of course, next week’s key Australian Consumer Price Index (CPI) results from Q1 could also influence the Pound to Australian Dollar (GBP/AUD) exchange rate outlook if it surprises.
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