AUD GBP Surges Again on Rate Expectations and UK Budget

AUD GBP Higher as Lockdown Fears Grip Europe

The AUD GBP exchange rate was 0.45% higher on Wednesday as traders starting to consider the prospects for an Australian rate hike. The Reserve Bank’s insistence that a hike would only come in 2024 is being pressured by the latest figures. The pound is also under pressure from Rishi Sunak’s budget.

The AUD GBP exchange rate is trading at 0.5470 after a strong rally on the country’s exit from lockdowns.

Australian bond yields higher on inflation rate hike boost

Australia’s three-year bond yield jumped to the highest level since July 2019 after consumer inflation increased in the September quarter, strengthening rate-hike bets.

Yields were higher by 24 basis points to 1.01% after the Reserve Bank’s preferred indicator of ‘trimmed mean inflation’ rose 2.1% in the third quarter to top economist estimates.

The bond selloff is similar to events in the New Zealand market last week, with the fastest pace of inflation in a decade.  The supply chain issues created from government lockdowns are now coming home to roost and they also have higher debt loads from pandemic spending.

“Inflation has begun its ascent earlier than many central bank officials expected and current price pressures suggest they are unlikely to be transitory,” said Prashant Newhana, a senior strategist at TD Securities in Singapore.

“For markets, the question is whether this sell-off in rates is done? We don’t think so.”

Rishi Sunak delivers big spending budget, talk of early election

UK Chancellor Rishi Sunak has put Britain on course for its largest tax burden since the 1950s in a heavy spending Budget delivering £150bn of extra commitments.

Sunak had told the Andrew Marr Show on Sunday that “strong investment in public services” would be central to the Budget. The Office for Budget Responsibility said there was a “a significant discretionary increase” in both the tax burden and the size of the state.

The big spending budget actually added to pound weakness with fears of an earlier general election. The advertising guru Sir Martin Sorrell said: “This budget and spending review sets up the prospect of an early General Election… it sets the scene for the prospect of a giveaway Budget next Autumn before going early to the polls.”

Spending is forecast to jump by £22.9bn a year by 2026-7, following a £25bn boost to departmental budget, while public spending as a share of GDP is forecast to be over40% by 2027 – the largest since the late 1970s.

The Chancellor was boosted by an OBR forecast that the economy will grow by 6.5% this year – the fastest growth rate since 1973. The UK economy is also said to be only 2% lower than the pre-virus levels and should return to those levels at the start of the year.

A lower-than-expected unemployment peak of 5.2% was also good news with 2m fewer workers out of work than expected in the early stages of the pandemic.

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