Pound Sterling to Australian Dollar (GBP/AUD) Exchange Rate Under Pressure After UK Inflation Disappointment

October 17, 2018 – Written by Frank Davies

September’s UK consumer price index proved weaker than forecast, leaving the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate on a downtrend on Wednesday.

Investors were not impressed to find that the headline annual inflation rate had eased from 2.7% to 2.4% in September, even though this is likely to lead to stronger wage growth.

With inflation easing back towards the Bank of England’s (BoE) 2% target the case for any imminent monetary policy action naturally diminished.

This left GBP exchange rates on the back foot as policymakers look set to leave interest rates on hold until the Brexit deadline passes.

A continued impasse over the Irish border added to the bearish mood of the Pound, meanwhile, as Theresa May headed to a crunch meeting with EU leaders.

Although the mood towards the Australian Dollar proved generally muted in the wake of a disappointing leading index reading this was not enough to boost the GBP/AUD exchange rate.

Australian Dollar (AUD) Exchange Rates Muted on Weakening Economic Momentum

Confidence in the outlook of the Australian economy diminished in response to September’s leading index, which contracted -0.06% on the month.

This suggests that economic momentum eased in September, raising the risks of third quarter growth disappointing and exposing the Australian Dollar to downside pressure.

Bill Evans, Chief Economist at Westpac, noted:

‘Despite a lift back above trend this month, the Index growth rate continues to point to slowing momentum heading into year end.

‘Over the seven months from October last year to April this year the growth rate averaged 0.89%. In the five months since April the growth rate has averaged only 0.13% – a clear step down.

‘Westpac expects momentum to slow to around 2.5% in the second half of 2018, which will be slightly below trend, with this slower pace to be sustained through 2019 at around trend of 2.7%.’

Demand for the Australian Dollar could diminish further if Thursday’s labour market data fails to impress.

Evidence of a slowing labour market may weigh heavily on AUD exchange rates, particularly if the monthly employment change figure falls short of forecast.

Weaker employment could encourage the Reserve Bank of Australia (RBA) to remain on hold for longer, to the detriment of the Australian Dollar.

Fears of No-Deal Brexit to Drive Pound Sterling Australian Dollar (GBP/AUD) Exchange Rate Lower

Worries over Brexit may well keep the GBP/AUD exchange rate on the back foot in the days ahead, with investors increasingly wary of the prospect of the UK leaving the EU without a deal.

Tensions between UK and EU negotiators look set to ramp up further ahead of the weekend, leaving the Pound vulnerable to selling pressure.

As Danske Bank’s UK economist Mikael Milhøj commented:

‘This is not surprising given that we are too far away from the deadline for the politicians to make compromises and it is not unlikely we will have to wait until December or maybe even January before we get a deal. Indeed, a delay may make it easier for May to get the Brexit agreement through Parliament.

‘Also, we probably need to get passed the UK budget on 29 October, as May’s supporting party, the DUP, has threatened to vote against the budget, as they are opposed to what is on the table with regard to the backstop agreement right now.’

Some support may be in store for GBP exchange rates on Thursday, however, if September’s UK retail sales data proves positive.

Evidence of resilient consumer spending could encourage greater confidence in the outlook of the wider economy, given the significant role of consumers in driving growth.

On the other hand, if sales lost momentum in September the mood towards the Pound may sour further.

However, even a solid uptick in sales may not be enough to outweigh Brexit jitters if markets fail to see any signs of progress towards a deal.

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TAGS: Pound Australian Dollar Forecasts