Australian dollar vs Pound Sterling Exchange Rate: GBP/AUD In Recovery Mode
- Written by: Gary Howes
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Australian dollar exchange rates (AUD) have surged higher on Wednesday after markets were caught with their pants down over an inflation release. Inflation is running a lot higher than previously expected in Australia at 0.8% per quarter.
The Australian dollar has seen a degree of relief over the past few hours as the below figures show, however the outlook for the Aus dollar remains challenging as fundamental issues relating to a slow-down in non-mining investment and the Chinese economy linger in the background.
The British pound sterling has meanwhile powered higher in the wake of news that UK unemployment has dropped to within 0.1% of the Bank of England's unemployment rate threshold.
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Australian dollar exchange rate action over the past 24 hours
Australia’s Q4 CPI report showed a 0.8% rise on quarter, much better than the 0.4% rise the market was looking for.
On-year, CPI came in at 2.7% while the trimmed mean reading was at 0.9%. This was the largest rise in the trimmed mean since Q2 2011 and the annual reading of 2.6% now lies in the top half of the RBA’s target band.
The reason the Aus dollar has reacted so positively is because markets were simply not expecting this surprise. Traders are now factoring in the reality that the RBA now has less room to manoeuvre within in terms of dropping interest rates or taking any other stimulatory measures in the face of a cooling Australian mining sector.
The ability of the central bank to react to a slowing Chinese market will also be constrained by this inflation data.
Outlook for pound sterling vs Aus dollar
The British pound was boosted on Wednesday morning by news that UK unemployment had fallen to 7.1 pct. Analysts had expected a reading of 7.3% to be announced.
The UK employment situation is thus improving at break-neck speed and markets are seeing the rate approach the Bank of England's 7% unemployment threshold at a rate few could have imagined.
But, today's release of the January MPC minutes confirmed that the Bank is in no rush to hike interest rates, even if the threshold is hit.
So now markets will increasingly speculate as to what excuses and shifted goal posts the Bank will come up with to justify keeping rates on hold.
One area that could be exploited is the slow pick up in pay. Pay rates grew at 0.9 pct in the quarter, analysts had expected growth of 1 pct. The rate of growth is still well below inflation at 2 pct suggesting there remains slack within the economy which will require low interest rates for longer.
"The combined effect of UK employment data as well as MPC minutes should help the pound curb losses, and trading at 1.8700 is possible," says Sasha Nugent at Caxton FX.
Outlook for AUS dollar exchange rates
Analyst Stan Shamu at IG says traders are likely to sell the Australian dollar on any signs of strength, referring to the AUD/USD:
"There is still room for shorts in the AUD on strength. The region between 0.885 and 0.89 presents significant resistance after having seen some consolidation in the past.
"The 0.888 level is also the 38.2% retracement of the drop from highs above 0.90 in mid-January until the low from this week below 0.88. This could tempt short-term traders to eye shorts in the near term. The sharp drop in iron ore prices will also be a potential driver of further downside for the AUD in the short term."
Also remaining bearish is Ipek Ozkardeskaya at Swissquote Bank:
"AUDUSD rallied from 0.8788 to 0.8877. Trend and momentum indicators give mixed signals. The MACD will turn positive for a daily close above 0.8905 (which also corresponds to the 21-dma), offers are seen pre-0.8900. On a similar pattern, AUDNZD recovered from 1.0576 to 1.0666. The bias remains comfortably bearish; we remain sellers on rallies below 1.0745 – uptrend channel top."
