AUD GBP Higher as Reopening Hopes Continue

AUD GBP Could Move Lower as PMI Data Awaits

The AUD GBP exchange rate was 0.25% higher on Thursday as the hopes for a reopening in the Aussie economy boost the dollar. The UK saw a sharp rise in house prices to a new record in September, but analysts worry about inflation in the UK.

The AUD to GBP exchange rate is trading at 0.5363 and the pair will target the 0.5400 price level.

UK inflation tipped to soar to 7% according to markets

Deutsche Bank chief credit strategist, Jim Reid, has said that the UK may be staring at runaway inflation of up to 7% as early as April.

Reid pointed out that the extraordinary moves in natural gas prices have contributed to pushing global inflation metrics to multi-year highs, with index-linked bonds now implying that the UK Retail Price Index (RPI) inflation will be 7% in April 2022.

As Reid explained, this is the month that the energy regulator Ofgem will update its price cap for utility bills. Typically, the RPI/CPI gap is around 1% but can be wider when energy prices are higher.

“Regardless of which inflation gauge is used, it’s fair to say that the cost of living is going up fast. In any case, RPI is used by the UK government to set things like train prices and student loan rates. Some students could, in theory, be facing 10% interest on their student loans if this continues, 100 times the BoE base rate.”

However, “it is likely that the UK government will mitigate a lot of these impacts as many governments around the world are doing for the lower paid in order to offset the rise in energy costs. Expect this to be a recurring theme.”

The summary comment sums up the reason that governments are having to buy their own bonds for billions per month:

“It would take a brave person to receive a low fixed income (bond) for any length of time with all the transitory, cyclical, and structural inflation in the pipeline.”

Minister suggests coal lending facility for Australia

Australia’s resources minister has suggested setting up a government-run A$250 billion lending facility for the coal industry in return for supporting a net-zero carbon emissions plan for 2050.

Keith Pitt, a member of the National Party, told the AFR his idea was for the government to be the “lender of last resort” to the mining sector as banks and insurers are increasingly unwilling to fund and underwrite the industry. The move would support Australia’s “dirty” economy, which has been propping up the country during the lockdowns.

“If we want to look after 300,000 jobs, provide power to 70% of homes, the Australian government will have to become the lender of last resort,” he said.

Prime Minister Scott Morrison said on Thursday that he will advise on the government’s position on emissions before the COP26 conference in Glasgow, but it’s not clear if he will attend. Attendees have been asked to bring ambitious targets for reducing emissions.