Sterling and Australian dollar exchange rate wobbles amid shifting market backdrop

The British pound/Australian dollar (GBP/AUD) exchange rate hovered in a narrow range on Wednesday morning as markets braced for inflation rate data from the United States.

At the time of writing, the GBP/AUD pair was trading at A$1.7348, down from the daily high of A$1.7373.

Australian dollar (AUD) exchange rates wobble as risk appetite shifts

The Australian Dollar (AUD) fell overnight as the pessimistic mood in the market put pressure on the risk-sensitive currency.

Asian stock markets fell as a risk impulse swept through markets, in part due to ongoing geopolitical tensions between China and Taiwan.

China has conducted military drills, including live-fire exercises, around Taiwan in apparent response to a visit to the island by US House Speaker Nancy Pelosi. Beijing considers Taiwan a breakaway province from China and has warned the international community not to show support for its sovereignty.

This week, China extended its military exercises. Although they have eased slightly, analysts believe the latest escalation could set a new base for increased aggression around Taiwan.

However, the Australian dollar then managed to regain ground as European trading began. The mood in European markets was slightly more bullish, providing some support for the risk-sensitive Aussie.

British Pound (GBP) exchange rates dampened by energy cost fears

bannerMeanwhile, the British pound (GBP) trended lower against the Australian dollar on Wednesday morning as concerns over rising UK energy bills continued to hurt the pound.

On Tuesday, energy market consultancy Cornwall Insight revised its forecast for energy bills upwards, with costs now pegged at £4,200 a year in January. Commentators have warned that such price hikes could be ‘catastrophic’ for UK households and, in turn, devastating for the UK economy.

The revised forecast comes as UK household energy debt hits an all-time high. UK households already owe suppliers £1.3bn, despite the fact that summer is usually a time when people are building up credit due to reduced electricity consumption.

Justina Miltienyte, Policy Manager at uSwitch, commented:

“Energy debt has reached an all-time high at the worst possible time, turning this winter’s energy price hike into a deeply precarious situation for many households.

“This is an alarming situation, as summer is traditionally a time when households use less electricity for heating, helping bill payers build up energy credit ahead of winter.”

With the ruling Conservative Party currently embroiled in a bitter leadership race, markets fear the government’s response to the deepening crisis will be delayed until a new leader is elected next month. .

Critics of favorite Liz Truss have warned her plans will not help those most vulnerable to the crisis in the cost of living and rising energy bills.

News that Chancellor Nadhim Zahawi and Business Secretary Kwasi Kwarteng will meet energy bosses tomorrow may have eased fears somewhat, with the Treasury considering toughening its windfall tax on oil and gas companies making record profits .

In addition, Boris Johnson stepped in unexpectedly, saying he was “absolutely certain” his successor as Prime Minister would provide further support to struggling households.

Prospects for increased fiscal support from the government may have cushioned the pound’s decline somewhat.

All in all, the GBP/AUD pair has generally been declining sideways.

GBP/AUD exchange rate forecast: US inflation at a glance

One factor that kept the GBP/AUD in a narrow range may have been market caution ahead of the US inflation rate reading.

Inflation data could prove crucial in determining how much the Federal Reserve will raise interest rates at its next meeting. If US inflation beats expectations, bets on a Fed rate hike will likely increase. This in turn could trigger widespread risk aversion, which in turn could hurt the risk-sensitive ‘Australian’ dollar.

Meanwhile, any new headlines regarding the UK government’s potential responses to soaring energy bills could affect the pound.