GBP/AUD supported around 1.7662 but stymied above 1.80Surprise inflation fall aids AUD/USD but hampers GBP/AUDBuoyant USD aids GBP/AUD as rallying RMB leans against China factors, Fed policy & USD direction key in short-term

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The Pound to Australian Dollar exchange rate retreated further from recent highs above 1.80 in midweek trade and could be likely to wander within a 1.7660 to 1.8046 range over the coming days as a tug-of-war plays out between a buoyant U.S. Dollar and rallying Chinese Renminbi.

Australia's Dollar was one of the top performers in the G10 bucket on Wednesday as Asia Pacific currencies benefited from another rally by the Renminbi and the antipodean unit itself appeared to be rewarded after official data detailed a surprise fall in Australian inflation rates for October.

"CPI showed inflation slowed on a broad range of measures," says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia.

"Nevertheless, the monthly CPI confirmed that inflation is still running at too high a pace. We expect a final 25bp rate hike by the RBA in December to 3.1%. We see a risk that AUD can fall if market participants unwind rate expectations in line with our view," she writes in a Wednesday market commentary.

Australian inflation dipped from an annual 7.3% to 6.9% during October when the economist consensus had looked for a further increase to 7.6% with the downward surprise owing to lesser price increases across most items featured within the consumer price index.

Above: Pound to Australian Dollar rate shown at daily intervals with selected moving-averages and Fibonacci retracements of September rally indicating possible areas of technical support for Sterling. Click image for closer inspection.

October's inflation rate may well have fallen even further if not for accelerated increases in prices of housing, transport and fuel but the outcome is still likely to matter for the Reserve Bank of Australia (RBA), which is set to announce its final interest rate decision of the year next Tuesday.

"The risk is that forecasts of an inflation peak around 7.75-8% by the end of the year is too high which would mean that expectations for rate hikes in 2023 could come down," says Diana Mousina, a senior economist at AMP Capital.

"We still expect a 0.25% lift to the cash rate at the RBA’s December meeting (which would take the cash rate to 3.1% from 2.85%) and see little risk of a pause from the RBA at this meeting as the central bank doesn’t meet again until February," she writes in a research review of Wednesday's data.

While the RBA is seen as still likely to raise its interest rate to 3.1% next week the October fall in inflation could see the RBA become more confident that it will not need to raise borrowing costs much further in order to be content that inflation will eventually return to within its two-to-three percent target band.

"As outlined in the ABS's recent discussion paper, we note the monthly CPI data should be interpreted with caution given they do not fully capture prices changes in all items of the CPI basket," warns Andrew Boak, chief economist for Australia & New Zealand at Goldman Sachs.

Above: Changes in market-implied measure of investor expectations for RBA cash rate. Source: Goldman Sachs Marquee.

"In particular, around 38% of items are imputed to be 0%mom in the first month of each quarter given they are not surveyed until the second month of the quarter - including many administered and market-services items," Boak and colleagues addd in a Wednesday review of the data.

Australian Dollar exchange rates rose following Wednesday's inflation data while the Pound to Australian Dollar rate fell but when it comes to the outlook for the antipodean currency it's offshore factors like the U.S. Dollar and ongoing rally in the Renminbi that are likely to matter more ahead of next week's RBA decision.

"Despite the news on inflation [in Europe and Australia] we had the USD softer across the board. USD/CNH collapsed into the London morning session on very little in the way of new information," writes Brad Bechtel, head of FX strategy at Jefferies, in a Wednesday market commentary.

"We continue to get a mixed news flow on the covid front and their PMI data overnight was weaker than expected and still contractionary. USD/CNH was supported around 7.15000 with the onshore fix at 7.1769 before the London morning took the pair down to 7.0796 the low, and we are 7.0874 now," he adds.

Bechtel notes that Wednesday's widespread decline in U.S. Dollar exchange rates was led by China's Renminbi as it rallied back from Monday's losses for a second consecutive session, likely providing a supportive tailwind to other currencies along the way.

Above: AUD/USD shown at daily intervals alongside GBP/USD, an upside-down or inverted Dollar-Renminbi rate and GBP/AUD. 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.

For as long as the Renminbi remains on an upward trajectory the Aussie could benefit to the detriment of GBP/AUD, which generally has a positive correlation with the U.S. Dollar Index, though the second half of the week will see market appetite for many currencies tested.

This is as Wednesday's release of third quarter U.S. GDP data is set to be followed in the evening hours by a keynote speech from Federal Reserve Chairman Jerome Powell that potentially poses upside risks for American bond yields and U.S. Dollar exchange rates.

"I don’t see Powell being explicit enough on where terminal should be ahead of the start of the blackout period. As such, I don’t think today is a market mover," writes Bipan Rai, North American head of FX strategy at CIBC Capital Markets, who also says "We’re neutral on the USD for now."

While Wednesday's schedule could yet prove to be a non-event, Thursday will see the October reading of the Fed's preferred measure of inflation released ahead of Friday's non-farm payrolls report for the month of November, while most currencies including the Australian Dollar and Pound could be impacted.

But without anything to drive either a sharp move higher or lower in the U.S. Dollar, GBP/AUD might be most likely to continue trading between the Fibonacci level that has supported it around 1.7662 in recent weeks and the 100-week moving-average at 1.8046 that has barred its path higher over that period.

Above: Pound to Australian Dollar rate shown at weekly intervals with selected moving-averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.