Whilst today is a relatively quiet data day for the United Kingdom, all eyes will turn tomorrow to the UK’s consumer price index (CPI) figure, with this being the final reading before the Bank of England’s (BoE) next interest rate decision.
The odds of a rate hike from the BoE are rising, but how will this release affect the GBP AUD exchange rate?
BoE Rate Hike Prospects: The Present Situation for GBP AUD Exchange Rates
Pound Sterling (GBP) exchange rates have been fluctuating amid ongoing debates regarding the prospect of a November rate hike from the BoE, with markets torn between cautiously awaiting clarity over the UK’s future relationship with the EU and a UK inflation rate that continues to soar significantly above target levels.
This debate has now shifted heavily into hawkish favour, with Bank Governor Mark Carney asserting at the September meeting that the Monetary Policy Committee (MPC) could soon begin withdrawing stimulus measures.
This has been accompanied by various hawkish titbits from MPC members, with a notable shift in their stances – indeed, 5 out of 9 of the members are now considered hawkish, with 3 centrist and only 1, Silvana Tenreyro, dovish.
Beyond this, the swaps markets is predicting an 82% chance of a 25-basis-point rate hike at the November meeting.
Chief Investment Officer at Rathbones, Julian Chillingworth, however, discussed the possibility that Carney’s hawkish shift could be a bluff.
He stated:
‘Whether it’s a bluff or not is difficult to say. Several times in the past Governor Mark Carney has turned hawkish in phrase without following up with action. Still, this time round inflation is running hot and the market is inclined to take him seriously’.
This assertion has also been echoed by analysts at Standard and Poor’s, who recently claimed that Carney’s statements were mostly efforts to ‘prop up the Pound’ in order to reduce inflationary pressures.
Nonetheless, the threat remains that the bank will wait too long before confronting the UK’s ever growing rate of inflation, particularly with wage growth continuing to remain so lacklustre.
UK Inflation Forecast and GBP AUD Exchange Rate Outlook
The GBP AUD exchange rate is liable to become increasingly volatile tomorrow on the release of the UK’s inflation figures, with the headline reading (year-on-year, September) forecast to print at 3.1% (up from previous 2.9%).
The month-on-month figure, however, is forecast to drop from 0.6% in August to 0.3% in September, with the core inflation reading forecast to remain steady at 2.7%.
Whilst this prognostication is mixed, unless a significant drop occurs the UK’s consumer price index figures will remain far above the Bank’s target levels.
In this respect, a jump to 3% or above in the headline figure alone would likely drive large amounts of investor demand to Sterling – with markets currently waiting with baited breath for any indication that a rate hike may be even more likely in November.
If, however, Standard and Poor’s are correct, and Carney did successfully subdue inflation levels, then demand for may shift in the ‘Aussie’ Dollar’s favour, though whether this will be long lived is questionable.
Yellen Outlook Positive – AUD Could Come Under Pressure
The ability of the ‘Aussie’ Dollar to capitalise on any potential weakness that occurs tomorrow for the Pound could be nullified by recent comments from Federal Reserve Chairman Janet Yellen.
Yellen demonstrated a positive outlook for the US economy on Sunday, asserting that recent storms Harvey and Irma will only temporarily weigh on economic growth and that they should be followed by a rebound.
In addition, her comments pointed to the possibility that the Fed will resume raising interest rates, with markets fairly confident that a third rate hike will occur in December.
This outlook provides a stark contrast to the outlook for the Reserve Bank of Australia (RBA), who continue to espouse caution.
Because of this contrast, markets are liable to continually favour the ‘Greenback’ over its Australian counterpart, a possibility that could leave GBP AUD climbing as the year draws to an end.
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