Pound Australian Dollar (GBP/AUD) Exchange Rate Weakens as UK Labour Market Cools

January 12, 2023 - Written by John Cameron

STORY LINK Pound Australian Dollar (GBP/AUD) Exchange Rate Weakens as UK Labour Market Cools

Pound Australian Dollar (GBP/AUD) Exchange Rate Weakens as UK Labour Market Shows Signs of Cooling

The Pound Australian Dollar (GBP/AUD) exchange rate weakened on Thursday, as the UK’s labour market showed signs of beginning to cool down.

At the time of writing, GBP/AUD traded at around AU$1.7515, a decline of roughly 0.5% from Thursday’s opening rates.

Pound (GBP) Stumbles amid Bleak Economic Outlook

The Pound (GBP) struggled for support on Thursday, as the UK’s economic outlook continued to darken ahead of Friday’s GDP data.

Thursday brought news that the UK’s labour market may be on the verge of cooling. The Office for National Statistics (ONS) stated in a report that the number of online job averts had fallen by 3%, the latest in a series of declines, down to pre Coronavirus pandemic levels.

The ONS stated:
‘The “HR and recruitment” job category saw the largest decrease and fell by 19%, followed by the “energy, oil and gas” job category, which fell by 7%. Of the 12 UK countries and English regions, the largest falls were seen in the East Midlands, London and the North East, which all fell by 5%.’

With this in mind, investors were mindful of the UK’s economic outlook as the country approaches a recession. Further exerting pressure on Sterling was a pull back in rate hike expectations from the Bank of England (BoE) due to the UK’s sombre economic outlook.

Australian Dollar (AUD) Strengthens as Chinese Inflation Increases

The Australian Dollar (AUD) enjoyed support on Thursday, as the currency was boosted by its nature as a Chinese proxy-currency.

With Chinese consumer inflation increasing, investors cheered that the second largest economy in the world appeared to be avoiding deflation, which in turn lifted the ‘Aussie’ against most major peers.

Zichun Huang, a China Economist at Capital Economics explored the data release further. She stated:
‘Consumer price inflation ticked up in December, while producer price deflation eased. There are some early signs that the transition toward living with Covid is starting to put upward pressure on prices, but the uptick in inflation is unlikely to be as large as that seen in many other economies as they reopened. And we doubt that inflation will impose any major constraints on the [central bank’s] ability to support the economy.’

Furthermore, a fall in US inflation also served to support the ‘Aussie’. With this fall pointing to a laxer tightening path for the Federal Reserve, which in turn could mean a shallower global recession, the markets shifted to an upbeat mood.

Due to its risk-sensitive nature, this positive mood across the session saw the Australian Dollar supported over safer currencies.

Pound Australian Dollar (GBP/AUD) Exchange Rate Forecast: UK GDP to Weaken Sterling?

Looking ahead for the Pound, Friday brings the release of the latest GDP data for November. A fall from 0.5% to -0.2% is expected, which could weaken Sterling by adding further evidence that the UK’s economy will enter a tough recession.

Similarly, a widening trade balance deficit may further weigh on the Pound during Friday’s session. With the deficit forecast to increase from £-14.476bn to £-14.9bn, it may reflect the UK’s struggle with inflation on imported goods. As such, investors may be hesitant to support GBP due to the bleak economic outlook.

Furthermore, with industrial action continuing across the UK any further headlines relating to more walkouts or strikes could exert extra pressure on the Pound.

For the Australian Dollar (AUD), a fall in new home owner loans could damped the ‘Aussie’ by pointing to a fall in demand in the Australian housing market. With Australia’s economic outlook looking similar bleak as a global recession seems on the cards, this downturn may drive AUD investors towards safer options.

However, the ‘Aussie’ may be lifted by an expected increase in China’s trade surplus during December. Friday’s data release for this is forecast to show an increase in surplus from $69.84bn to $76.2bn, reflecting the reopening of China’s economy due to the government’s shift away from zero-Covid.

Because AUD acts as a Chinese proxy-currency, the improvement in Chinese trade may bring strength to AUD exchange rates.

Elsewhere, risk appetite across markets may cause GBP/AUD to fall, should trade continue to strike a risk-on attitude. As the Australian Dollar is more sensitive to risk than the Pound, AUD may benefit from an upbeat market mood.

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