Following Hot Australian Inflation Data, the Pound Slumps Against the Australian Dollar

The Australian Dollar (AUD) is surging against the Pound (GBP) and all other major currencies following the release of stronger-than-expected inflation data midweek. The news caused a significant drop in the value of the British currency against its Aussie counterpart.

Joe Manimbo, the Senior FX Analyst at Convera, said, "The Aussie dollar rolled to 5-month highs after red-hot domestic inflation - and the highest in 3 decades - put a Reserve Bank of Australia interest rate hike next month more firmly on the table."

The latest Consumer Price Index (CPI) data out of Australia reported an annual increase of 7.8% in the fourth quarter, compared to 7.3% previously and beating expectations of a rise to 7.5%. This is the highest inflation rate, and it has markets raising bets that the Reserve Bank of Australia (RBA) will have to raise interest rates next month.

Analysts also attribute other factors for strengthening AUD against GBP, such as risk appetite increasing across global markets as vaccine rollouts progress, improved job security, reduced Covid-19 restrictions, and a recovery in corporate profits, which has boosted stocks and commodity prices worldwide.

"Trimmed mean inflation was well above the central bank's expectation of 6.5% YoY. So, the RBA's preferred measure of core inflation is running well above its forecast, which will concern the central bank as it could be signalling more persistent inflation than it anticipated," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The release of stronger-than-expected inflation data has seen expectations for the Reserve Bank of Australia (RBA) to pause its rate hiking cycle on February 08 fall dramatically, with 65 basis points now priced in for the RBA, taking its peak policy rate to near 3.75%.

Inflationary pressures growing higher than anticipated also means that economic growth may be faster than expected, which could lead to further rises in interest rates by the RBA should they deem it necessary. However, this decision would depend mainly on other economic indicators such as employment data and GDP figures due soon.

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