GBP/AUD paring losses but at risk from RBAAn upside of expectation for 0.25% rate riseBoE speakers also heard as UK GDP eyedThis article was updated following publication to correct a mistatement of Australia's final quarter inflation rate.

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The Pound to Australian Dollar exchange rate pared its early February losses to open the new week but local strategists say the rebound could run out of steam ahead of 1.78, while Sterling would also risk fresh losses if the Reserve Bank of Australia (RBA) strikes a hawkish chord on Tuesday.

Australia's Dollar remained the best-performing currency in the G10 contingent for the new year even as it gave quarter to most counterparts for a second successive session in Monday price action helped GBP/AUD to reverse all of last week's loss.

GBP/AUD tested its 200-day moving average at 1.7546 in the opening European session and could potentially reach 1.7793 if the RBA indicates that Tuesday's anticipated increase in the cash rate is to be the last, according to Commonwealth Bank of Australia.

"AUD/GBP can test downside support at 0.5620 (38.2% Fibbo) [1.7793] on Tuesday if financial markets wind back expectations for further tightening," writes Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia, in a Monday review of CBA's forecasts.

"AUD/GBP is trading close to fair value. We expect AUD/GBP to stay close to current levels through 2023," she adds.

Above: GBP/AUD at daily intervals with Fibonacci retracements of September and October rallies indicating possible areas of technical support. Selected moving averages denote possible support and resistance. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Economists and markets expect the RBA to announce its ninth increase in the cash rate since May 2022 on Tuesday with the benchmark seen rising 25 basis points to 3.35% ahead of a further anticipated increase in March.

Market-implied expectations suggest the RBA is likely to raise the rate to 3.5% next month, though most recently pricing has crept higher to imply some prospect of another 25 basis point increase to 3.6% next month.

"The signals coming from Australian economic data over the past month or so have been erratic. December labour data disappointed with employment unexpectedly dropping," says Jane Foley, head of FX strategy at Rabobank.

"That was followed by a surprisingly strong Q4 CPI inflation report and then by a weak print for December retail sales which plunged by 3.9 m/m. The latter points to the cost-of-living crisis that is currently being experienced by many Australians," Foley writes in a Monday review of Rabobank's forecasts.

Source: Commonwealth Bank of Australia. Click image for closer inspection.

The size of this Tuesday's interest rate rise and any remarks about the outlook for borrowing costs are likely to set the direction for the Australian Dollar in the days ahead, and much of this will be determined by what the RBA makes of the latest inflation figures.

Australian inflation reached an annualised 7.8% in the final quarter while the RBA said in its December interest rate decision that inflation was "forecast to peak at around 8 per cent over the year to the December quarter."

"Any significant changes to the RBA’s post-meeting statement will likely have a larger impact on AUD/USD. The main downside risk to AUD/USD is if the RBA follows the lead of the Bank of Canada by suggesting it will pause increasing the cash rate to assess the impact of tightening to date," Kong and colleagues say.

Tuesday's decision is the highlight of the Australian calendar in a busy week for Sterling with numerous Bank of England (BoE) policymakers scheduled to speak ahead of Friday's release of final quarter GDP data on Friday.

Source: Commonwealth Bank of Australia. Click image for closer inspection. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

The Pound to Australian Dollar rate fell heavily last week when the BoE appeared to adopt a non-committal stance on the outlook for Bank Rate, though Sterling benefited on Monday after the Monetary Policy Committee's Catherine Mann set out her preference for further increases up ahead.

"The BoE's primary goal appears to have tilted towards the avoidance of a hard landing," writes Stephen Gallo, European head of FX strategy at BMO Capital Markets, in a Monday forecast review.

"However, given tightness in the labour market and supply side constraints on the economy's ability to produce non-inflationary growth, we see elevated risks of the BoE being forced to take more drastic action later in the year if inflation disappoints," he adds.

Other speakers out this week include Chief Economist Huw Pill, Deputy Governo David Ramsden and Deputy Governor John Cunliffe, although how Sterling and GBP/AUD end the week and data revealing whether the UK economy slipped into recession last quarter or not.

The latter remains a close call with economists widely expecting that growth stalled at 0% owing to an anticipated -0.3% reading for December GDP. to have stalled but for the country to have avoided a recession.

Above: Model-derived estimates of trading ranges for selected currency pairs this week. Source Pound Sterling Live.