GBP/AUD Faces Further Downside as Rate Expectations Diverge

The Pound to Australian Dollar exchange rate is facing further losses due to diverging expectations of interest rate hikes from the Bank of England (BoE) and the Reserve Bank of Australia (RBA). Markets currently price around four BoE hikes by July next year, but analysts at Commonwealth Bank of Australia (CBA) warn that a paring of these expectations could weigh on GBP/USD, which in turn would transfer weight onto GBP/AUD.

Australian rates are expected to keep rising, with markets pricing close to a 90% chance of an RBA hike on September 29. ANZ expects the cash rate to continue increasing beyond that date.

CBA economist Sanjay Raja notes that Governor Michele Bullock has described Australia's labour market as 'a bit tight', while the BoE sees no equivalent pressure from the UK labour market. This suggests that the UK case for hikes is dependent on energy prices, which could be lowered by the reopening of the Strait of Hormuz within five to ten weeks.

Deutsche Bank economist Daniella Arcadipane warns that any policy tightening in the UK remains contingent on the energy price outlook. In contrast, the RBA's concern centres on domestic pressures that lower oil prices do not resolve.