GBP AUD Bounce May Be Short-lived with RBA Headache 

The GBPAUD exchange rate bounced on Friday but traded at the lows of April. A bullish day sets the stage for a recovery. However, after recent failures at the 1.7800 level, it now wallows at the bottom of the range near 1.7200-7300. A break below those levels could damage the pound sterling.  

The GBP to AUD rate opens the week at the 1.7340 level and awaits Australian inflation figures on Wednesday. 

UK leadership race enters the final stages with Truss ahead

The UK leadership race is now between Rishi Sunak and Liz Truss. The former Chancellor and foreign secretary will directly engage in a UK tour for Tory party votes ahead of the September deadline. 

Rabobank explained that the two runners will face a ballot of 160,000 paid-up Conservative party members. As a result, the UK’s new PM will have worked in Johnson’s cabinet. A relatively small number of people, mostly male, half of whom are over 60 years old and 97% of whom are white will choose the candidate. This demographic does not capture the wider electorate in the UK. Can the new leader place adequate distance between the position and Johnson to appeal to a greater share of the electorate? 

The UK government must address concerns that dogged GBP investors in respect to opportunity and growth for post-Brexit UK. Faced with a cost-of-living crisis, it is unclear if a new PM will change the gloomy outlook that weighed on the GBP for the past 12 months.  

The two candidates have differing views on the path ahead, with Ms Truss talking of a red tape “bonfire” over Brexit and touting tax cuts. Rishi Sunak says those tax ideas are a “fairytale” and proposes a more austere approach to the country’s finances. 

Australian inflation could give the RBA a headache

Australia awaits the latest inflation figures on Wednesday, with markets expecting a print of 6.3%. That would be a significant jump from the 5.1% of last month and could give the Reserve Bank a headache in the fight against rising prices and falling wages. 

The minutes of the July policy meeting showed last week that the bank continues its bullish stance on interest rates. The RBA board held discussions about a neutral rate, noting the current rate of 1.35% was lower than this. 

The minutes reported that the level of interest rates is significantly lower for an economy with a tight labour market that faces a period of higher inflation. Members noted the importance of inflation expectations remaining “anchored” as this period is likely temporary.  

It is clear that the RBA has plans for further interest rate hikes, and any adverse inflationary spikes could add to the speed of those increases. 

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