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Market Analyst
The BoE vs RBA policy divergence is pushing sterling higher against the Australian dollar, as the Reserve Bank of Australia pairs a rate hike with a signal that a prolonged pause could follow while markets price further Bank of England tightening. GBP/AUD has broken decisively higher, even as the British pound slips against a U.S. dollar strengthened by hotter-than-expected U.S. CPI inflation. Sterling is holding up relatively well against other major currencies, supported by sticky UK inflation and expectations of a hawkish Bank of England. UK growth data is the next test for those tightening expectations.
Fawad Razaqzada, StoneX Media Market Analyst at StoneX, covers forex, indices, commodities and cryptocurrencies through macroeconomic and technical analysis. That coverage gives insight into how diverging Bank of England and Reserve Bank of Australia policy paths are driving sterling against the Australian dollar.
The Reserve Bank of Australia raised interest rates but signaled that a prolonged pause could follow, weakening the Australian dollar against sterling. The Australian dollar was already contending with a weakening economy at home and softer demand from China, Australia's largest trading partner. Razaqzada points out that the central bank "raised interest rates, but accompanied that by a strong signal that a prolonged pause could now follow," a combination that took support away from the Aussie. As a result, GBP/AUD moved decisively higher and cleared a resistance zone that had capped several rallies earlier in the year. The gap between a Reserve Bank of Australia signaling a hold and a Bank of England still expected to tighten has become a key driver of the cross.
"While the cable may struggle to make headway against a resurgent U.S. dollar, the pound Aussie arguably offers a more attractive opportunity for sterling bulls," Razaqzada says. The Bank of England is expected to maintain a hawkish stance, with markets pricing further rate hikes as UK inflation stays sticky. Conversely, hotter-than-expected U.S. CPI inflation has lifted the U.S. dollar across the board, leaving GBP/USD under pressure even as sterling holds up against other major currencies. A UK GDP reading in line with or stronger than expectations would reinforce the view that the UK economy remains resilient despite elevated interest rates. Specifically, it would give the Bank of England little reason to push back against market expectations of further rate hikes.
The BoE vs RBA policy gap shows up first in UK GDP releases, UK inflation data and guidance from the Reserve Bank of Australia. The monthly and quarterly UK GDP estimates show if the UK economy remains resilient enough to sustain Bank of England rate hike expectations. UK inflation readings show if price pressures stay sticky, while Reserve Bank of Australia guidance shows if its pause signal holds. Notably, U.S. CPI inflation shapes the dollar side of sterling's moves, which is why GBP/USD and GBP/AUD can move in different directions.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fawad Razaqzada, StoneX Media Market Analyst
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