AUD's Resilience and GBP's Challenges

GBP: treading water

The British Pound (GBP) remains one of the weakest currencies among the G10 FX currencies this month. This is primarily due to a lacklustre performance in the UK job market data, which failed to provide any relief to the GBP, resulting in a decline in GBP exchange rates.

Today's attention turns towards the release of the latest UK Gross Domestic Product (GDP) and external trade figures for July. However, these figures may not offer much support either. A month ago, UK economic activity for June pleasantly surprised with a significant uptick (0.5% Month-on-Month growth compared to the expected 0.2%). This was largely attributed to positive base effects stemming from an extra bank holiday. Nevertheless, the ups and downs in economic activity from month to month may have a lasting impact.

Economists surveyed by Bloomberg are currently anticipating a contraction of -0.2% Month-on-Month in the July UK GDP, influenced by data suggesting that adverse weather conditions in the month deterred UK consumers, in addition to broader monetary conditions tightening. Ultimately, today's data is unlikely to alter the prospects for the UK economy, which is expected to continue stagnating. This outlook aligns with the scenario outlined by the Bank of England (BoE) in its August Monetary Policy Report (MPR) and was reaffirmed yesterday by incoming Deputy Governor Sarah Breeden.

Given this less-than-optimistic backdrop, the GBP may continue to struggle and could be more susceptible to threats of stagflation compared to other major currencies.

AUD: labouring away

The Australian Dollar (AUD) has seen positive gains this week, thanks in part to the efforts of policymakers in both Japan and China who are determined to prevent further depreciation of their respective currencies. In particular, the AUD has acted as a stand-in or proxy for the Chinese Yuan (CNH) for investors, and it has notably benefited from the People's Bank of China's (PBoC) resolute stance against allowing the CNY to weaken further.

However, a critical moment for the AUD lies in today's release of US Consumer Price Index (CPI) data. If the US inflation data surprises on the upside, it could have a dual impact on the AUD. Firstly, it may lead to a weakening of the AUD due to higher US Treasury (UST) yields. Secondly, there could be a corresponding decrease in risk sentiment as UST yields rise. Furthermore, should the PBoC maintain its strong position against further CNY depreciation in response to higher US inflation, it could drive more investors to use the AUD as a substitute for the weakening CNY.

Looking ahead, Australia is set to release its labour market data for August on Thursday. While this data is expected to play a more background role, it's important to note that the Reserve Bank of Australia (RBA) signalled last week that it holds a modest tightening bias. With the market pricing in about a one-in-three chance of another 25-basis point rate hike by the RBA in this tightening cycle, the risks surrounding the labour market data lean towards a positive outcome for the AUD. However, leading indicators for the Labor market have shown signs of softening, suggesting that Australia's unemployment rate may continue to rise as employment growth slows.

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