The GBP AUD exchange rate was -0.80% lower after another rise in Chinese inflation figures. Gains in the Australian dollar defied weaker consumer sentiment figures this week, but retail sales were better. Political tensions continue to weigh on the pound sterling with Prime Minister Boris Johnson adding to fears over the Northern Ireland protocol.
The GBP to AUD trades at 1.7615 with the 1.7700 level putting a headwind on recent pound sterling gains.
Inflation and interest rates have hurt consumer sentiment
The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 5.6% to 90.4 in May from 95.8 in April.
The Index has now reached its lowest level since August 2020 when households were worried about the coronavirus ‘second wave’ lockdown in Victoria. The weakness this time is being driven by “the combination of rising cost of living pressures and the prospect of rising interest rates,” according to Westpac bank.
“Excluding the shocks to confidence associated with the pandemic, this fall of 5.6% is the largest since a 6.9% fall in June 2015, when a steep fall in global share markets was triggered by concerns about the stability of the European financial system and a slowdown in China,” Westpac said.
“Consumer spending is much more buoyant over 2022 to date, as households respond to the reopening of the economy. This lift reflects a normalisation from the ‘low spending/high saving’ pattern seen during the COVID restrictions and is being supported by a large reserve of excess savings accumulated over the past two years,” the bank added.
While headline inflation pressures may ease from this point, consumers are aware that the Reserve Bank plans to continue increasing the cash rate for some time. Westpac expects to see multiple increases through the rest of the year with the cash rate peaking at 2.25% in May 2023.
Australian retail sales were better-than-expected for a third straight month in March as spending grew some momentum. Data from the Australian Bureau of Statistics on Wednesday showed retail sales jumped 1.6 percent in March to a record $33.6 billion Australian dollars which easily beat forecasts of a 0.6 percent gain.
Boris Johnson rattles the EU cage once more with protocol threat
In the UK, Boris Johnson has reiterated a threat that the UK will override parts of the Northern Ireland protocol. Johnson warned the EU that the Good Friday Agreement is more important than the post-Brexit deal.
The Prime Minister said that there is no cross-community support for the deal and that “we need to sort it out”. Any move to change the protocol will upset European lawmakers.
German Chancellor Olaf Scholz said “no-one should unilaterally cancel, break or in any way attack the settlement”. At a press conference in Sweden, Johnson faced questions over whether it is the right time to pick a fight with the EU while the Russian invasion is ongoing.
“The most important agreement is the 25-year-old Belfast Good Friday Agreement,” the Prime Minister said.