AUD/USD tumbles as fall out from UK fiscal stimulus plans continues

Daily currency update

The Australian dollar plunged through trade on Monday as market appetite for risk evaporates amid elevated volatility across global rates and currency markets. Having come under pressure leading into last weeks close the AUD extended its downturn, slipping below $US0.65 to mark fresh lows at $US0.6440, a staggering 3% below Friday’s open. Price action across major currencies exploded following the release of the UK mini budget, wherein the new Chancellor of the Exchequer announced a free spending fiscal plan, driven by deep tax cuts. With the Bank of England fighting to control inflation the introduction of an uber aggressive fiscal stimulus program is expected to counter policy makers efforts and add even greater inflationary pressures. In response markets have rushed to price an astounding 170-point rate adjustment leading into the November Policy Meeting while lifting expectations for the peak underlying cash rate to 6%. The shift in expectations for BoE policy comes on the heels of a raft of aggressive central bank policy updates. Central Banks are actively deploying bellicose rate adjustments in the hope of tackling inflation. This shift in global monetary policy has helped drive demand for haven assets as analyst and investors prepare for a deeper and long run global recession. Sustained interest rate hikes are expected to crush the post Covid global economic recovery opening the door to sustained AUD weakness. Having broken key supports the AUD is increasingly vulnerable to further downward correction.

Key movers

The Great British pound led price action across major currencies through trade on Monday, plunging a staggering 8.2% across just two trading sessions as markets adjust expectations for BoE policy and gilts yields. The introduction of a mini-budget plan to aggressively stimulate the embattled British economy prompted an emphatically negative response from investors, propelling rates higher while driving the GBP toward all time lows below $US1.04. While Sterling has recovered back toward $US1.07 it is still 5% below Friday’s open and appears poised for a possible break below parity. The GBP sell-off permeated other major currencies with the Euro driven further below parity, marking new 20-year lows at $US0.96 while the USD reveled in risk off environment. The surge in global rates further dampened demand for the Yen with the USD/JPY pushing back above JP¥144.50, highlighting just how hard it will be for the Japanese Ministry of Finance to deliver meaningful long-term support to the embattled Japanese Yen. The UK will remain in focus through the next 24 hours with European CPI data and Fed commentary providing colour and direction. With markets scrambling to adjust expectations we anticipate elevated volatility through the upcoming trading session.

Expected ranges

• AUD/USD: 0.6380 – 0.6550 ▼
• AUD/EUR: 0.6680 – 0.6780 ▼
• GBP/AUD: 1.6080 – 1.6780 ▼
• AUD/NZD: 1.1280 – 1.1480 ▲
• AUD/CAD: 0.8840 – 0.8970 ▼