GBP Slips Vs AUD As UK Economic Outlook Darkens

The Pound Australian Dollar (GBP/AUD) exchange rate initially strengthened overnight but quickly reversed its gains as strong Chinese trade data helped the Australian Dollar (AUD) recover.

As the European session began, worries about the UK’s economic outlook weighed on the Pound (GBP).

Australian Dollar (AUD) Exchange Rates Mixed on Chinese Trade and Economic Warnings

The Australian Dollar initially fell in overnight trade after the Commonwealth Bank of Australia (CBA) – the country’s largest bank – lowered its GDP growth forecasts for 2022 and 2023 in response to the Reserve Bank of Australia’s (RBA) latest aggressive rate rise.

Earlier this week, the RBA surprised markets with a hawkish 50-bps rate hike, bringing its cash rate up to 0.85%. Although this boosted AUD at first, the ‘Aussie’ has been unable to sustain the upside.

With more aggressive action expected down the line, the CBA believes the RBA will tighten too quickly, thereby denting Australian economic growth.

The CBA now sees the Australian economy expanding 3.5% this year, rather than the previously expected 4.7%. It then forecasts that growth will slow to 2.1% in 2023. The CBA also said it expects the RBA to reverse course in the second half of 2023, enacting rate cuts to spur growth.

This downbeat assessment initially weighed on AUD. However, positive trade data from China helped to reverse the Australian Dollar’s losses. As the ‘Aussie’ is often traded as a proxy for the Chinese economy, unexpectedly strong export growth for China boosted AUD.

Pound (GBP) Exchange Rates Fall as Growth Forecasts Slashed

Meanwhile, the Pound is under pressure as the UK’s economic growth forecasts have also been downgraded, and the outlook is much bleaker.

Last night, the British Chambers of Commerce (BCC) cut its expectations for UK GDP to 3.5% this year. In 2023, the BCC sees UK economic growth almost stagnating at 0.6%.

Alex Veitch, Director of Policy at the BCC, said:

‘Our latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth. The war in Ukraine came just as the UK was beginning a Covid recovery; placing a further squeeze on business profitability.

‘The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.

‘With inflation forecast to race ahead of wages, we are concerned about a dip in consumer spending which would further impact businesses and hamper growth. We forecast that if trends continue, inflation will only return to the Bank of England’s target rate at the end of 2024, implying a prolonged period of difficulty for the UK.

‘Against this backdrop, the government must put in place stable and supportive policies that help businesses pull the UK out of this economic quagmire. Firms must be given confidence to invest, only then can they drive the growth the economy so desperately needs.’

This bleak assessment came shortly after the Organisation for Economic Co-operation and Development (OECD) also slashed growth forecasts. The Paris-based thinktank said yesterday that UK GDP may stall in 2023.

With the UK’s economic outlook growing ever bleaker, Sterling is facing selling pressure today.

GBP/AUD Exchange Rate Forecast: Chinese Inflation in Focus

Looking ahead, China’s latest inflation rate reading could impact ADU overnight. Economists expect annual inflation to edge up by 0.1 percentage points in May to print at 2.2%. If inflation exceeds forecasts, as it did in April, then AUD could climb due to its status as a China proxy. However, if Covid lockdowns impacted inflation then AUD could slip.

As for the UK, there’s little data on the calendar for the rest of the week. Therefore, domestic political and economic news could continue to drive Sterling.