GBP AUD Gets a Lift but Sterling Still Weak

The GBP AUD exchange rate bounced by 0.10% on Monday as the British pound shrugged off recent selling. The pair now awaits the latest Westpac consumer confidence figures which will highlight the state of play ahead of the latest reopening. As we saw with the UK economy, Melbourne’s version of “Eat Out to Help Out” will warp future consumer and inflation numbers.

The AUD GBP exchange trades at 1.8255 ahead of the latest data.

Australian economy faces ‘downside risks’ from China slowdown

Treasurer Josh Frydenberg has said that China’s slowing construction sector and a drop in demand for iron ore presents big challenges for Australia’s economy.

“The Chinese economy is starting to slow for both cyclical and structural reasons and the housing sector, which is a large part of their economy, has seen a bit of a slow down as well,” Mr Frydenberg said.

“Coal supply constraints saw price spikes, energy rationing in some provinces and a slowdown in industrial production,” he added.

“Chinese government limits on steel production have also contributed to lower levels of activity.”

Frydenberg admitted that the iron ore demand issue was key, and the Chinese property sector is still seeing stress. Iron ore was worth $125 billion to the Australian economy, with China buying about 70% of that number.

The housing slowdown will have an impact but if China cuts down on its carbon footprint as planned then Australia will need a plan B.

But the treasurer said that the Federal Government was preparing for that price to drop further by March.

“We’ve got a pretty conservative estimate mat of the iron ore price in our budget at $55 a tonne. So, we’ve actually built in some buffers there.”

Bank of England’s Bailey reiterates call to act on inflation

The Bank of England governor Andrew Bailey has reiterated a recent call that the bank will have to act if it sees higher inflation.

“What we’re concerned about… is once you start to get an increase in inflation of this sort we want to stop it becoming generalised in the economy,” Bailey said on Monday.

His comments come after a previous statement led to expectations of a rate hike in November which fell flat at last week’s meeting. That led to another repricing of expectations and a slump in the pound sterling.

Bailey added that was a risk of more bottlenecks in the economy, especially in labor demand for which could push inflation higher.

“And that’s why we would, and will, have to act on interest rates if we see that evidence becoming clear,” he said.

Meanwhile, Boris Johnson continues to feel the heat of recent ‘sleaze’ accusations. The PM is being criticized for his handling of the Owen Paterson issue and that is adding political headwinds to the pound. The Northern Ireland Article 16 issue is another weight for sterling as Europe fears that the UK will pull the plug on the protocol after COP26.

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