AUDGBP Rally Hits Falters After Hawkish BoE Talk

AUD GBP Trades Above 0.5300 Ahead of Consumer Confidence

The AUDGBP exchange rate was flat on Thursday after the Bank of England adopted a slightly hawkish tone with talk of tapering their bond buying to cope with higher inflation. The Aussie dollar was helped by the latest trade balance figures which showed a slight improvement.

The AUD to GBP pair trades above 0.5310 but the BoE taper talk could see pound support.

Bank of England holds rates but raises inflation target

The Bank of England voted unanimously to hold interest rates steady at 0.1% but the bank said that inflation could peak at 4%, which is a whole 1% higher than their previous forecasts. That led to the bank’s governor saying that some “modest tightening” of bond buying was needed.

“We plan to start with a ceasing to reinvest as the gilts that we hold mature,” Bailey told Bloomberg, explaining the tightening plan. “We’re not going to be selling the whole stock because the level of reserves demanded by the banking system now is higher than it was pre-financial crisis.”

Investors still expect the current interest rate to stay in place until the second half of 2023.

“Given a choice of tightening policy too early or too late, the bank currently appears far more comfortable with the latter option,” said Hugh Gimber, global market strategist at JPMorgan Asset Management.

The MPC forecast that the rise to 4% inflation was likely to be temporary as the current surge in energy prices and imported goods reverts back towards its 2% target.

Australian trade balance improves

The Aussie dollar found support from the latest trade balance figures with the goods and services surplus increasing $1,227m to $10,496m in June. Exports rose $1,489m $43,337. Imports rose $261m to $32,840m.

The Aussie dollar has been weighed by the latest lockdown in Sydney and two other places joined today with Newcastle and Hunter seeing further lockdowns.

The one-week snap lockdown which began at 5pm on Thursday was called after five new cases turned up in Newcastle and eight were logged in the Central Coast.

New South Wales accounts for a third of total payroll jobs and Victoria around a quarter, so the rebound in Australian jobs will be hit by the latest lockdowns and it also pushes the RBA’s tightening further out as the bank was focused on full employment.

Ryan Felsman, senior economist at Commsec, said the damage to the labour market was “broad based”, with small businesses losing the most jobs.

“Forward-looking indicators of labour demand, such as the ANZ measure of job advertisements, also weakened in July but the NSW JobSaver program and COVID-19 disaster payments may limit the damage to the labour market,” he said.

But EY senior economist Johnathan McMenamin struck a more sombre tone, saying that the sharp decline in payroll jobs in July occurred before restrictions were placed on construction work in NSW.

The AUD to GBP trades at 0.5310 with resistance ahead at 0.5380 but the pound is still supported by the reopening.