RMIT Finance - Market View Report: AUD/GBP Exchange Rate Analysis

This market view report examines the factors influencing the AUD/GBP exchange rate. The report begins with an introduction defining exchange rates and their determination, followed by an analysis of key economic indicators in both Australia and the UK, including interest rates and inflation rates. The analysis considers the impact of these indicators on the exchange rate. The report also incorporates exchange rate expectations to forecast future movements. The conclusion, based on the market analysis, suggests that the AUD is likely to appreciate against the GBP in the next 3 to 6 months, primarily due to more favorable economic indicators in Australia, particularly higher interest rates. The report concludes by referencing sources like academic journals and online data sources to support the analysis and findings.

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Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
Exchange rate can be defined as cost of currency of a country in terms of another
currency. This can be both either fixed or floating. This is a market view report in which
currency of two countries that is Australian Dollar and British Pound. On the basis of discussion
and analysis of different factors conclusion will be drawn whether currency will go up or down.
MAIN BODY
Currency exchange determination is concerned with determination of exchange rate in
which a certain amount of domestic currency is to be paid in order to get a unit of foreign
currency. In Australia currency exchange is determined by market forces and it fluctuates
constantly. In Australia exchange rate can be measured through two ways in which one is the
bilateral exchange rate against US Dollar and another is trade weighted index. In UK exchange
rate for Pound is determined on the basis of supply and demand (Pandey and et.al., 2018). Pound
get stronger when there are more people do buy pound. At present exchange rate of Australian
Dollar and Pound Sterling or British Pound is 0.56, this reflect that in order to buy one
Australian Dollar 0.56 Pound sterling is to be given. Regarding exchange rate of British pound
and Australian Dollar it is 1.79, it reflects that in order to buy 1 pound sterling 1.79 Australian
Dollar is to be given.
In determination of exchange rate economic indicators play very important role.
Economic indicators in Australia and UK are-
Interest Rate
Interest rate is very important economic indicator for determination of exchange rate.
Higher interest rate in a country attracts foreign capital and contributes in increasing exchange
rate.
According to World Bank data interest rate in Australia is highly fluctuating and from 2011
interest rate in Australia is continuously decreasing. In 2011 interest rate was 7.738 and in 2019
interest rate were 5.101 this also has reduced further because of Covid-19 (Lending interest rate
(%), 2021).
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In UK interest rate is continuously decreasing and interest rate that was 0.75% in 2019 later
reduced to 0.1% in 2020 (Interest rates and Bank Rate, 2021).
Inflation Rate
Inflation rate also have very important impact on exchange rate of currency. Regarding this,
when inflation rate is higher in such situation exchange rate of currency reduces or depreciates
also known as losing value of currency exchange rate. On the other hand inflation rate when is
lower, this increases value of currency exchange or currency exchange appreciates.
In Australia inflation rate is also highly fluctuating. In 2021 inflation rate is 1.73% which
was higher than previous year’s inflation rate that was 0.87%. Inflation rate in Australia is
constantly fluctuating and each passing year variation in inflation rate is visible. Concerned with
future inflation rate in Australia, this is expected to increase (Australia: Inflation rate from 1986
to 2026, 2021).
Figure 1 Inflation Rate in Australia
In UK inflation rate in 2021 is 1.21% and this rate was 0.77% in 2020 and after 2021 in
future inflation rate in UK is expected to increase. Inflation rate in UK is also highly fluctuating
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but constant reduction and increase in inflation rate is visible in inflation rate of UK (United
Kingdom: Inflation rate from 1985 to 2025, 2021).
Figure 2 Inflation Rate in UK
Exchange rate expectation
Exchange rate expectation is concerned with joint tests for developing hypothesis about
exchange rate. This is also a model of exchange rate determination. This also influence exchange
rate because it becomes basis for determination of exchange rate (Alagidede and Ibrahim, 2017).
Exchange rate forecast for Australian dollar and British pound is 0.54 in march 2021 and
is likely to increase to 0.55 in June 2021, later is expected to stay constant and reduce 0.53.
CONCLUSION
On the basis of market analysis it can be said that AUD is likely to appreciate against
GBP. This is because economic indicators of Australia are favourable and better than that of UK.
Regarding interest rate there is huge difference and Australia have higher interest rate than UK.
Regarding inflation rate Australia and UK does not have much difference in inflation rate and
this is why interest rate becomes a very important consideration, on the basis of which AUD is
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likely to appreciate against GBP. Along with this, UK also have significantly affected because of
Covid-19 impact on economy and this directly affect exchange rate of GBP. Overall it can be
said in next 3 to 6 months AUD rates will go up.
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REFERENCES
Books and Journals
Alagidede, P. and Ibrahim, M., 2017. On the causes and effects of exchange rate volatility on
economic growth: Evidence from Ghana. Journal of African Business, 18(2), pp.169-
193.
Pandey, T.N and et.al., 2018. A novel committee machine and reviews of neural network and
statistical models for currency exchange rate prediction: An experimental
analysis. Journal of King Saud University-Computer and Information Sciences.
Online
Australia: Inflation rate from 1986 to 2026. 2021. [Online]. Available Through:
<https://www.statista.com/statistics/271845/inflation-rate-in-australia/>.
Interest rates and Bank Rate. 2021. [Online]. Available Through:
<https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate>.
Lending interest rate (%). 2021. [Online]. Available Through:
<https://data.worldbank.org/indicator/FR.INR.LEND?
end=2020&start=2020&view=map&year=2020>.
United Kingdom: Inflation rate from 1985 to 2025. 2021. [Online]. Available Through:
<https://www.statista.com/statistics/270384/inflation-rate-in-the-united-kingdom/>.
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