GBP/AUD Reaches Resistance; Interest Rates Are In Its Decade High

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The Pound to Australian Dollar exchange rate (GBP/AUD) fell from recent highs as the Reserve Bank of Australia (RBA) hiked interest rates by 25 basis points while indicating that it was not ready to terminate the rate hike cycle.

The Reserve Bank of Australia is expecting to increase lending rates even further. It is already at its decade-high of 3.10%. Yet, experts say that inflation pushes them on the edge of notching the rates up even further before the year ends.

According to Sean Callow, Westpac‘s Senior Currency Strategist:

“The Australian dollar flickered up from 0.6715 to 0.6735 in response to the 25bp cash rate hike which was fully expected by economists but only about 80% priced into money markets. The statement maintained the line that the RBA ‘expects to increase interest rates further over the period ahead’, which is Australian Dollar-supportive.”

Australia is now higher than its ten wealthiest International Monetary Fund peers, G10, in terms of market developments knowing that the central bank plans to raise the interest. RBA’s decision is assumed to make the GBP/AUD struggle at the resistance band. However, the tendency still appears upward, and an eventual break cannot be ruled out.

“The Aussie which has been underperforming in recent weeks and in fact is #9 in the G10 since 3 October, the eve of the RBA’s unexpected reversion to 25bp steps. The Kiwi is easy #1 this time, backed by a hawkish RBNZ,” Callow added.

ANZ economists say the cash rate target will spike more in May 2023, around 3.85%. As per David Plank, Head of ANZ Economics, the numbers will further expand as wages and CPI pushes the RBA to do so.

However, the ballooning inflation will soon tell RBA to stop their proportional reaction, and they will quickly reach the glass’s brim and stop adding more.

Although ANZ’s forecast of 3.85% is slightly higher than current market expectations, it does not represent the kind of rate expectation movement required to set the Aussie on fire.

The Commonwealth Bank of Australia (CBA) now forecasts a high cash rate of 3.35% in February 2023, much lower than market expectations.

The volume and pace of recent hikes justify another 25bp rate hike.

“RBA have delivered a massive amount of tightening in a short space of time. The RBA’s 5bp interest rate hike today means that they have taken the cash rate up by a whopping 300bp between 4 May and 6 December–(eight meetings over seven months). And as Governor Lowe noted in his post-meeting Statement ‘there has been a substantial cumulative increase in interest rates since May’,” says Gareth Aird, Head of Australian Economics at CBA.

CBA expects RBA to cut to 50 bp at the end of 2023. The cuts, whether in conjunction with other significant banks or not, will determine the performance of AUD in the next year, providing ease to the pressing of the currency. Non-domestic factors will also be one of the concerns of AUD; one of them is China’s restriction on their CoViD response.

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