The Pound (GBP) wavered against the Australian Dollar (AUD) last week, with UK PMI data hitting a 16-month low to compound inflationary fears as the ‘Aussie’ enjoyed robust data to close the session at around the $1.7649 mark.

Pound (GBP) Exchange Rates’ Recovery Capped by Mounting Inflationary Pressures

The Pound slid heavily against the Australian Dollar during the first half of this week in the face of poorer-than-expected PMI data. Abysmal service-sector growth reflected a drastic slowdown in consumer demand and stoked fears of a looming recession.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: ‘The UK PMI survey data signal a severe slowing in the rate of economic growth in May, with forward-looking indicators hinting that worse is to come.

‘There are some signs that the rate of inflation could soon peak, with companies reporting price resistance from customers, and it is likely that the slowing in demand will help pull prices down in coming months. However, the latest data indicate a heightened risk of the economy falling into recession as the fights to control inflation.’

Further weighing on the Pound in midweek trade was the release of the Sue Grey report, investigations into the ‘Partygate’ scandal, where Prime Minister Boris Johnson came under scrutiny over illegal parties at Downing Street during the pandemic. Threats to Johnson’s leadership created political instability, deterring investors.

Sterling then firmed again in the latter half of the week in response to Chancellor Rishi Sunak’s new fiscal support package.

Its’s hoped the £15bn support package could help prop up consumer spending and allow the UK to avoid slipping into a recession this year.

Australian Dollar (AUD) Exchange Rates Recover Despite Political Uncertainty

The Australian Dollar started the week on the back foot as the country was still coming to terms with a change of government and the political volatility that usually follows a regime shift.

To compound matters, Australian PMI data printed poorly. With supply shortages, bad weather and Covid-related labour issues being the main factors behind a drop in both manufacturing and services sector activity.

Elsewhere, the Australian Dollar came under more pressure as the ‘zero Covid’ policy in China, Australia’s biggest trade partner, weighed heavily on global supply chains.

Providing a modest tailwind for the ‘Aussie’ were hawkish comments from Reserve Bank of Australia’s (RBA) Assistant Governor Luci Ellis as she signalled more interest rate hikes are on the way.

Adding to this, the Australian Dollar closed the week on the front foot with strong retail sales figures, in line with predictions, providing a timely boost to the economy and in turn, the ‘Aussie’.

GBP/AUD Exchange Rate Forecast: Brexit Concerns to Provide Fresh Headwinds?

Looking ahead to next week’s session, the Pound Australian Dollar exchange rate is likely to be influenced by the ongoing political and economic turmoil currently engulfing the UK.

Brexit fears could heighten as the ongoing Northern Ireland protocol weighs on the Pound, along with the worsening cost-of-living crisis.

Elsewhere, Australia GDP growth data is due out early next week, with an expected drop in the first quarter. If data prints to market estimates, the Australian Dollar could slide against the Pound.

Also providing headwinds to the Aussie could be the expected contraction of Chinese manufacturing PMI. The factory sector is predicted to contract again for the month of May, the second consecutive month of contraction.