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Pound struggles as stubborn Australian inflation keeps rate hikes alive

The British pound-Australian dollar (GBPAUD) pair has come under pressure as markets increasingly expect the Reserve Bank of Australia (RBA) to raise interest rates again. While both the RBA and Bank of England (BoE) remain concerned about inflation, stronger Australian economic data and persistent price pressures have made the case for further tightening in Australia more immediate, giving the Australian dollar an advantage against the pound.

Australia's latest growth figures have strengthened that argument. The economy expanded 0.4% in the second quarter and 2.1% from a year earlier, beating expectations and showing that activity has remained relatively resilient despite higher borrowing costs. Combined with underlying inflation of 3.6%, the data have increased expectations that the RBA may need to do more to bring inflation under control. Markets are now pricing a roughly two-thirds chance of a September hike, with a 25-basis-point increase fully priced by November.

The UK faces a similar inflation problem, but the outlook for interest rates is less straightforward. Consumer price inflation rose to 2.9% in July, above the BoE's 2% target, while higher energy costs could push prices higher again later this year. At its latest meeting, however, the BoE voted 6–3 to keep Bank Rate unchanged at 3.75%, with three members preferring a quarter-point increase. That split shows that pressure for tighter policy is building, but there is not yet a majority behind another hike.

That debate has become more visible this week. BoE Chief Economist Huw Pill, who voted for a hike in July, argued that higher rates may be needed to prevent the latest inflation shock from lasting longer. However, other policymakers remain more cautious as the UK economy absorbs higher borrowing and energy costs. This leaves sterling sensitive to any data that changes the balance between inflation and growth.

"The Australian dollar is benefiting from a clearer rate story. Inflation remains stubborn, the economy has held up better than expected, and markets increasingly expect the RBA to raise rates again. The UK faces many of the same inflation concerns, but the Bank of England is more divided on what to do next. That difference is keeping attention firmly on upcoming inflation and jobs data in both countries," says Christopher Tahir, Senior Financial Markets Strategist at Exness.

For traders, the UK's August inflation report on 16 September will be particularly important, arriving just one day before the BoE's next interest-rate decision. In Australia, upcoming labour market and inflation data will help markets assess whether the RBA acts in September or waits until November.

Author

Christopher Tahir

CMT Level II | Certified Financial Planner (2012) Bachelor’s degree in Accounting Initiated the Indonesian translation of the Bitcoin Whitepaper (2018)

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