Home Daily Commentaries AUD tumbles as UK inflation pressures spark risk-off shift

AUD tumbles as UK inflation pressures spark risk-off shift

Daily Currency Update

The Australian dollar underperformed through trade on Wednesday, tumbling 1% and slipping back below US$0.6950 amid a surge in global bond rates and general risk-off shift. Having tracked sideways through the domestic session the AUD came under increased selling pressure overnight after UK CPI data showed a larger than anticipated increase in July. Annual headline inflation climbed through 10% as prices rose by 0.6% through the month of July. The sharp increase drove investors toward haven assets, propping up bond yields while weighing on equity markets and risk-sensitive currencies. Having touched intraday lows at US$0.6912 the AUD found some support following the release of the Fed’s FOMC meeting minutes. The minutes revealed policymakers expressed concern that elevated inflation pressures may become entrenched within the economy forcing the Fed to overtighten monetary policy, fostering a deeper economic recession. The dovish tone allowed the AUD to climb back toward US$0.6950.

In other news, a downside surprise in Australian wage price growth triggered an AUD downturn against key cross-currency counterparts. While leading indicators point to a significant lift in wages ahead, Q2 wage growth printed short of expectations exacerbating the cost of living pressures and dampening the consumer outlook. We turn our focus now to employment data. We anticipate unemployment will remain near record lows while job growth will remain healthy. A robust labour market and the promise of higher wages to come should give the RBA impetus to accelerate the pace of interest rate hikes, potentially helping to add a floor underneath the AUD.

Key Movers

UK inflation data set the mood for overnight trade, propelling global bond yields higher and driving investors toward haven assets. Inflation pressures were much stronger than anticipated in July forcing annual headline inflation above 10% while core inflation, which strips out highly price-sensitive items like food and energy was also significantly elevated, climbing above 6.1%. The surge in price pressures refocused investors' attentions on the challenges facing central banks, driving a surge in global bond yields. UK 2 and 10-year rates lurched higher as markets scrambled to price in a more aggressive path of monetary policy tightening. Analysts are now pricing a 30% chance of a 75 basis point hike and a cumulative 200 point Bank of England rate adjustment in the 6 months to March 2023. Despite the correction in interest rate expectations the GBP struggled to gather positive momentum, falling on the day amid a broader risk-off move and a dire economic outlook. Markets anticipate inflation could rise as much as 15% while the Bank of England is forecasting a 15-month period of negative growth as the UK attempts to battle the rising cost of living pressures.

With investors adopting a definitive risk-off tone the US dollar advanced on the day up 0.5% before edging lower into this morning’s open following the FOMC meeting minutes. The dovish undertone prompted investors to adjust expectations and bring forward Fed rate cuts next year. The dollar gave up 0.3% after the minutes were released.

Our attentions turn now to US Philadelphia fed business survey and jobless claims data for direction through trade on Thursday.

Expected Ranges

  • AUD/USD: 0.6880 - 0.7050 ▼
  • AUD/EUR: 0.6780 - 0.6880 ▼
  • GBP/AUD: 1.7220 - 1.7520 ▲
  • AUD/NZD: 1.1000 - 1.1100 ▼
  • AUD/CAD: 0.8920 - 0.9020 ▼