GBP AUD Continues to Unwind from Yearly Highs

GBP AUD Weaker as Australia Reopens Borders

The GBP AUD exchange rate was trading at 1.8200 on Friday as the unwind from the yearly highs above 1.19100 continues. The reopening path of New South Wales and Victoria has boosted the Aussie dollar and unwound the punishment dished out during the lockdown.

The AUD GBP exchange rate will look to the RBA and Bank of England rate meetings this week for direction.

Australian Reserve Bank meeting on Monday leads the pair

The Reserve Bank of Australia meets this week to announce their interest rate plans after a week of turmoil in the country’s bond market.

The yield on the Australian 2-Year bond exploded higher last week, doubling in a matter of minutes from 25bps to 50bps after the central bank refused to buy it at as part of its previous 0.1% yield curve control. The market saw the biggest one-day surge in 2Y yields since the Lehman Brothers crisis.

“The only conclusion we can draw is that the YCC regime is about to be formally dumped at next week’s meeting,” said Ben Jarman, a rate strategist at JPMorgan.

“If so, this is a startling about-face,” he added. “Dropping YCC is a strong signal, so we bring forward our expectation for the first hike from late 2023 to Q4, 2022.”

The Commonwealth Bank of Australia is now pricing in a rate hike for November 2022 by the RBA.

But some analysts argue that the market has got ahead of itself with rate hikes given annual wage growth in Australia of 1.7% is still well below the RBA’s desired level of 3% or more.

British central bank will move on rates this Thursday

The next day of volatility this week for the pound sterling versus the Aussie dollar is Thursday, where the RBA will release its monetary policy statement and the Bank of England has its interest rate meeting.

Some analysts are expecting the BoE to hike rates this week to counter a recent rise in inflation. JPMorgan, Deutsche Bank, Morgan Stanley and Santander have all brought their bets forward on when the bank will increase rates to this Thursday’s meeting.

 

The bank’s governor, Andrew Bailey, recently warned the Bank will “have to act” to rein in medium term inflation expectations.

The Bank’s new chief economist, Huw Pill, also said that inflation could rise to around five per cent. His forecast was matched by the Office for Budget Responsibility (OBR) with a pessimistic scenario in its budget forecast where inflation climbs above five per cent.

If this were to happen, officials at the BoE could lift rates to 3.5 per cent, the OBR said, which could plunge the British economy into recession. The OBR warned that if the Bank did not act in the current meeting, inflation could run away to as high as 8.5 per cent.

Analysts at ING bank said that a 0.15% rate hike could happen this week, with a less aggressive path in 2022 than many other analysts predict.

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