Nearing Support After Sharp Falls, Inflation Jitters in Focus

GBP/AUD price, news and analysis:

• Rising inflation has become an important driverof foreign exchange rates recently but data from Australia Wednesday showed a surprisingly large fall year/year.
• By contrast, the scope for UK Chancellor of the Exchequer Rishi Sunak to boost the economy in today’s UK Budget will likely be held back by increases in inflation that have raised the cost of servicing the national debt.
• That’s broadly positive for GBP/AUD as it approaches an important band of support after weeks of losses.

GBP/AUD nears support

GBP/AUD has been falling steadily since reaching a recent high at 1.9155 on August 20, dropping to around 1.8296 at the time of writing. Those losses were extended Wednesday even though Australia reported that its inflation rate fell to 3.0% year/year in the third quarter – below both the forecast 3.1% and the previous 3.8%. However, GBP/AUD is now approaching an important band of support that should at least stem the losses for a while.

As the chart below shows, GBP/AUD traded just above the 1.82 level throughout June and that level will need to be broken convincingly if the downturn is to extend. More likely it will steady there, with a minor rally following.

GBP/AUD Price Chart, Daily Timeframe (April 12 – October 27, 2021)

Source: IG (You can click on it for a larger image)

Inflation key to UK Budget

While the headline Australian inflation rate fell in Q3, inflation in the UK is a problem for UK Chancellor of the Exchequer Rishi Sunak as he prepares for his set-piece Budget Wednesday. Inflation expectations in the UK are currently at their highest since 2008, and the rate could top 5% by early next year, the Bank of England’s new Chief Economist Huw Pill warned a few days ago.

The Budget itself rarely moves GBP but rising inflation will nonetheless hamper Sunak’s spending plans and is broadly positive for the currency.

Note, though, that core inflation in Australia has hit its highest for six years and that could prompt the Reserve Bank of Australia to tighten monetary policy earlier than previously expected, perhaps by July next year. If that narrative begins to dominate sentiment, GBP/AUD would likely resume its decline once it has consolidated around current levels.

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex