GBP/AUD Rate Flounders in Risk Rally as BoE Decision Looms

• GBP/AUD's foothold at 1.80 in jeopardy as BoE risk looms
• Buoyant AUD/USD & rally in risk assets hamper GBP/AUD 
• Market looks for a ninth rate rise from BoE & more in 2023

Image © Adobe Images

The Pound to Australian Dollar exchange rate has established a foothold above 1.80 thus far in December but would risk falling back 1.79 in the days ahead if Thursday's Bank of England (BoE) decision rocks the boat for Sterling or if the Aussie continues to outperform over the remainder of the week. 

Australia's Dollar and others including Sterling benefited on Tuesday when the U.S. Dollar was sold across the board following a larger-than-expected decline in both main measures of U.S. inflation for November, though the strength of the antipodean currency's gains forced GBP/AUD onto the back foot.  

That made for a second retreat and surprise on the downside of expectations for U.S. inflation, which is something that could have potentially significant implications for the Federal Reserve (Fed) policy stance as soon as Wednesday when the latest decision and forecasts are announced.

The data makes it less likely that a majority of Federal Open Market Committee members will see a need to raise interest rates beyond the 4.75% that September's forecasts suggested would likely mark their peak. 

"Chair Powell’s tone likely will be less aggressively hawkish than in November, and his more dovish colleagues likely will be emboldened by this report. We now think 25bp is more likely on Feb 1, and we think that will be the final hike," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.  

Above: GBP/AUD shown at hourly intervals alongside GBP/USD and AUD/USD. Click image for closer inspection. 

The Fed is widely expected to lift its interest rate by half a percentage point to 4.5% and with September's forecasts previously suggesting 4.75% would be the peak for the Fed Funds rate, it has been implied already that there is likely only one further increase to come before any eventual cuts.

That is effectively what markets were betting on this Tuesday and is something which, if confirmed by the new forecasts on Wednesday, could mark a turning point for the way in which many around the market view the U.S. Dollar with implications for other currencies and pairs including GBP/AUD.

For instance, the Pound to Aussie rate often tends to struggle when the U.S. Dollar is falling as it did again on Tuesday so a deeper setback for the latter could act as a headwind for the uptrend in GBP/AUD, and this would be even more likely if Thursday's BoE decision rocks the boat for Sterling.

"There are indications that the trend in real GDP growth is slowing, apparent in yesterday's ONS data. Today’s numbers also show labour demand is slowing," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

"These developments may bring out another vote for a 25bps hike to join the lone 25bps voter at the November MPC. As such, we see the risk to our call for 50bps skewed towards a smaller hike as opposed to something larger," Galllo writes in review Tuesday's UK employment data. 

Above: Pound to Australian Dollar rate shown at 4-hour intervals with Fibonacci retracements of October's extended rally indicating possible areas of technical support for Sterling. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

Economists and financial markets expect a ninth increase in interest rates from the BoE on Thursday to take Bank Rate up to 3.5% while also penciling in further increases that would lift the benchmark to 4.5% or more as the U.S. interest rate cycle draws to a close during the early months of the new year.

But the BoE has sought to discourage these expectations in recent months and the risk is of it doing the same again on Thursday with possibly adverse implications for Sterling and GBP/AUD. 

"The BoE should disappoint market terminal rate expectations over time. One of the big risks for GBP lies in the vulnerability of the housing market, underscoring the drop in real incomes and higher mortgage rates," says Mark McCormick, global head of FX strategy at TD Securities.

"High-frequency growth forecasts point to relatively weak prospects in the UK even compared to EUR," McCormick writes in a Monday research briefing. 

Ahead of the BoE decision, however, there is a speech from Reserve Bank of Australia (RBA) Governor Philip Lowe at the AusPayNet Annual Summit in Sydney for the Australian Dollar and GBP/AUD to navigate though the topic of the address is not related to monetary policy. 

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of April sell-off indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.