GBP AUD Looks to Recover from Latest Headwind

GBP AUD Looks to Recover from Latest Headwind

The GBP AUD exchange rate was lower last week after the Bank of England (BoE) raised interest rates and offered a gloomy assessment of the UK economy moving forward. Australian retail sales will be released ahead of Tuesday’s session, while the UK will also get retail feedback from the BRC. Westpac consumer confidence is also released on Tuesday for Australia.

The GBP to AUD traded near the recent April lows of 1.7175 and opens the week at 1.7438.

Aussie leaders clash again in heated election debate

The two candidates for Australia’s next prime minister were asked about cost-of-living issues, corruption and rising inflation at a second leaders’ debate with only two to the vote to be held on May 21.

During the debate, which often descended into a yelling match between Prime Minister Scott Morrison and opposition Labor leader Anthony Albanese, each accused the other of being unsuitable to lead Australia.

Mr Albanese faced questions over his party’s previous support of a closer relationship with Beijing, while he was also reminded of some economic gaffes. The centre-right Liberal National coalition is campaigning for a fourth term of office on the back of a strong economy and low unemployment.

But the government is struggling to make up ground against the Labor opposition, who have led in opinion polls since early April. With a rising number of voters choosing to vote for minor parties, there is also a possibility that neither leader will win a majority, forcing Australia into a minority government.

New polling by Ipsos released ahead of the debate showed the Labor opposition pulling further ahead of the Liberal National coalition, growing their lead to 57 per cent ahead of the government’s 43%.

Capital Economics claims the BoE are being too downbeat

The Bank of England is being too pessimistic in its economic forecasts and will have to raise interest rates far higher than it expects, according to independent researchers.

Capital Economics feel the Bank is underestimating the potential for strength in the labour force, while they anticipate further support from the government. The Bank of England rocked the Pound Sterling last week after it released economic forecasts showing UK GDP would fall by 0.25% in 2023 and rise by just 0.25% in 2024.

But economists at Capital Economics say that the bank is being too downbeat due to energy prices being less sticky and households having savings to work with.

“If the Bank were to assume that energy prices fall back to the levels implied by futures curves, then GDP growth would be about 0.3 percentage points (ppts) higher in both 2023 and 2024,” said Ruth Gregory, Senior UK Economist at Capital Economics.

“Our central view is that the economy will not be as weak as the Bank expects,” Gregory added.

But the group believes that the Bank will hike rates to 3.00% next year, suggesting the market is now at risk of massively under-appreciating what is coming next.

“We think that in order to offset longer-lasting domestic price pressures, the MPC will have to raise interest rates much further than it expects,” says Gregory.