GBP V AUD: Pound LEAPS against Australian dollar on RBA rate bets
ALTHOUGH the pound stumbled slightly against the Australian dollar as the date chosen for the activation of Article 50 was announced, GBP/AUD bounced back dramatically today.
The pound surged by over 0.7 per cent against the Australian dollar, rebounding from a low of AU$1.599 to a high of AU$1.613 following the publication of minutes from the Reserve Bank of Australia’s (RBA) latest policy meeting and the UK’s inflation stats for February.
The RBA meeting minutes also sent the Australian dollar lower against the US dollar, euro and New Zealand dollar. AUD/USD dipped to $0.769, AUD/EUR dropped to €0.713 and AUD/NZD edged down to NZ$1.092.
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The minutes were more downbeat than expected and implied that the RBA has no plans to increase interest rates this year.
Although the recent uptick in commodity prices was highlighted as an upside, policymakers mentioned specific concerns about the economic risks being posed by the domestic housing and labour markets.
The minutes stated: "Recent data continued to suggest that there had been a build-up of risks associated with the housing market.
The Bank of England explains the exchange rate
"In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining.
In some markets, conditions had been strong and prices were rising briskly
"In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years.
"Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income.
"Supervisory measures had contributed to some strengthening of lending standards."
Although the RBA is not expected to cut interest rates any time soon, the fact that borrowing costs could remain on hold for a long time to come was enough to pressure the Australian dollar lower against currencies like the pound and US dollar.
The RBA’s concerns about Australia’s overheating housing market were particularly poignant as the national house price index for Q4 (published just before the minutes) came in at 4.1 per cent quarter-on-quarter, smashing the 2.5 per cent forecast, and 7.7 per cent year-on-year. An annual result of 6.3 per cent had been expected.
The GBP/AUD exchange rate was able to consolidate gains following the release of the UK’s consumer price index for February.
Last week’s Bank of England (BoE) interest rate decision saw one member of the Monetary Policy Committee (MPC) vote for higher borrowing costs as a result of climbing consumer price pressures.
Consequently, the surge in inflation recorded in February bolstered BoE rate hike expectations and gave the pound a boost.
UK CPI came in at 0.7 per cent month-on-month in February, up from -0.5 per cent in January and beating expectations for a reading of 0.5 per cent.
On the year, CPI jumped from 1.8 per cent to 2.3 per cent – above the BoE’s 2 per cent target and the highest level for three-and-a-half years.
Australia’s Westpac Leading index could inspire further Australian dollar movement as the week continues.
The GBP/AUD exchange rate could also extend gains on Thursday if the UK’s latest retail sales data shows the increase in consumer spending forecast by economists.
