Pure FX Blog

1 February 2018

Pound Nears 7-Week High Versus Aussie, as AU Inflation Stays Stable

The pound to Australian dollar interbank exchange rate has reached 1.7699 today, close to its highest since December 11th, as Australia's inflation stayed steady at 0.6% in Q4 2017. Image credit: Tracey Pearce-Jordan.

The pound to Australian dollar interbank exchange rate has reached 1.7699 today, very close to its highest since December 11th, as Australia’s inflation stayed steady at 0.6% in Q4 2017. Image credit: Tracey Pearce-Jordan.

by Peter Lavelle

Welcome to Pure FX’s latest update of the pound to Australian dollar interbank exchange rate.

This tells you when it’s a favourable time to exchange pounds to Australian dollars, for your money transfer!

Sterling jumps versus the Aussie! The pound to Australian dollar interbank exchange rate has reached 1.7699 today, very close to its highest in 7 weeks, or since December 11th.

The pound has jumped against the AU dollar, because Australia’s inflation rose by just +0.6% in Q4 2017 compared to 3 months before, said official data yesterday, less than forecast.

The Australian dollar has also lost out, because Australia’s inflation rose just 1.9% in Q4 year-on-year, said the Australian Bureau of Statistics on Wednesday, below the RBA’s 1.0%-3.0% mid-point.

In particular, Australia’s inflation rose less than predicted between October and December, because prices rose by just 1.0% in Darwin, and 0.8% in Perth. This weighed on Australia’s national inflation average.

This has dragged down the AU dollar, first because this was the 9th consecutive month with inflation below the RBA’s mid-point. This tells us that Australia’s economy is struggling to lift prices.

This has weakened the Aussie too, because below-forecast inflation cuts the odds that the Reserve Bank of Australia will hike Australia’s interest rates, above their current 1.5%!

Aussie weakens, as America’s Fed points to rising US inflation

Furthermore, the pound has also strengthened versus the Australian dollar, because yesterday America’s central bank, the Federal Reserve, signalled that US inflation may rise.

The Aussie has lost out, in particular because the Fed said that “inflation on a 12 month basis is expected to move up this year and to stabilise around the [US Fed’s] 2% objective.”

This has weakened the AU dollar, because when US inflation rises, this lifts the odds that America’s central bank will further lift US interest rates this year, above their current 1.25%-1.5%.

This has weighed on the Australian dollar, because if the Fed lifts US interest rates further, they’ll rise above Australia’s interest rates of just 1.5%, thus eating into Australia’s rate advantage.

This has dragged down the Aussie, because if US interest rates rise above Australia’s interest rates, it will be more profitable to invest in the USA, thus lifting demand for the USD over the AUD.

As a result, the Australian dollar has declined, lifting the pound close to this 7-week high versus the Aussie!

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

References

1. Ann Saphir, Jason Lange, “Fed leaves rates unchanged, sees inflation rising this year”, January 31st 2018, Reuters.com, https://www.reuters.com/article/us-usa-fed/fed-leaves-rates-unchanged-sees-inflation-rising-this-year-idUSKBN1FK0IQ
2. David Scutt, “Australia’s low inflation keeps rate hikes off the table, but price pressures are building in major cities”, January 31st 2018, BusinessInsider.com.au, https://www.businessinsider.com.au/australia-cpi-inflation-report-q4-2017-2018-1
3. David Scutt, “The Australian dollar finished January with a thud”, February 1st 2018, BusinessInsider.com.au, https://www.businessinsider.com.au/aud-australia-dollar-cpi-fomc-2018-1
4. Edward White, “Australian dollar dips after inflation misses expectations”, January 31st 2018, FT.com, https://www.ft.com/content/8fce0410-061b-11e8-9650-9c0ad2d7c5b5
5. Jonathan Shapiro, “Australian dollar to succumb to declining yield gap, warns Mark Farrington”, February 1st 2018, AFR.com, http://www.afr.com/business/banking-and-finance/hedge-funds/australian-dollar-to-succumb-to-declining-yield-gap-20180131-h0re77
6. Sophie Foster, “RBA set to continue its longest run of record low interest rates”, February 1st 2018, News.com.au, http://www.news.com.au/finance/real-estate/brisbane-qld/rba-set-to-continue-its-longest-run-of-record-low-interest-rates/news-story/b6814d3372ee90e021e911569ec483fd
7. Wayne Cole, “Australia inflation stays subdued in fourth quarter, rate hike still distant”, January 21st 2018, Reuters.com, https://www.reuters.com/article/us-australia-economy-inflation/australia-inflation-stays-subdued-in-fourth-quarter-rate-hike-still-distant-idUSKBN1FK0E5

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