Image © Adobe Images
Soft Australian core inflation erodes bets on another RBA hike, lifting GBP/AUD through its 100-day average.
The pound-to-Australian dollar exchange rate is 0.4% higher at 1.9014 on Wednesday, extending a rally that has carried it through the 100-day moving average after Australian inflation undershot expectations.
Trimmed mean CPI rose 0.2% in August, below the 0.3% consensus, keeping the annual rate at 3.6% for a third consecutive month.
Headline inflation rose 0.4% on the month, taking the annual rate to 4.0% from 3.5% on base effects, with fuel prices up 14.8% on the month.
The core reading matters more to the Reserve Bank of Australia, and its softness powered another day of domestic-driven outperformance in Australian bonds.
That helped the Australia-US ten-year yield spread narrow from 42 basis points on 11 September to 11 basis points today.
The same dynamic applies to UK-Australian spreads, with Australian ten-year yields at 5.35% now below UK equivalents, and it explains why GBP/AUD is surging.
"Soft CPI puts another nail in the coffin of back-to-back hikes and lets AUD rates run again (for now)," says a daily note from Commonwealth Bank of Australia's rates research team.
Hike Odds Under Pressure
The data lands a day after the RBA raised rates by 25 basis points but revealed it had considered holding, casting doubt on further tightening.
Money markets priced around a 60% chance of a back-to-back hike in November after that decision, which ING's Francesco Pesole said looked a bit too high.
Wednesday's inflation print pushes those odds lower, removing yield support from the best-yielding currency in the G10.
The Australian dollar has attracted foreign capital on the strength of that yield advantage, and a shorter hiking cycle erodes it.
The Technical Picture
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
Monday's week ahead forecast flagged the 100-day average as the target for a recovery from September's floor, and the pair has now reached it.
The pound-to-Australian dollar rate trades above the 100-day at 1.8994 and the 1.90 figure, with Wednesday's high at 1.9028.
The rally is now testing the downtrend line from July's high, which has capped every recovery attempt since.
A daily close above that line would open the way to 1.9362, the July high, with 1.9402 beyond.
The 21-day average at 1.8836 has turned higher from beneath, adding momentum to the recovery from the double bottom near 1.8735 set in September.
Not All See the Hiking Cycle Over
Westpac says the August figures landed on its expectations and sees little pressure to revise its forecasts for the third quarter.
The Australian bank expects trimmed mean inflation to stay well above the top of the RBA's 2-3% target band through to year-end, and it still expects the RBA to raise rates again in November.
A Westpac call that proves correct would restore yield support to the Aussie and cap the pound-to-Australian dollar rate at the downtrend line.
The next full test of that call is the September quarter CPI release in late October, which carries the quarterly trimmed mean the RBA weighs most heavily.
Until then, a close above the downtrend line puts 1.9362 in play for the pound-to-Australian dollar rate.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
