GBP/AUD up 5.0% last week aloneConsolidates ahead of RBAAnother 50bp hike expectedBut nears end of hike cyclePosing downside risks to AUD

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The Pound has recorded substantial advances against the Australian Dollar over recent days and whether these gains are held, built upon or reversed could well rest with the nature of Tuesday's Reserve Bank of Australia (RBA) rate decision.

The RBA is expected by markets to hike by a further 50 basis points, but analysts and market pricing suggests the central bank is close to the end of its hiking cycle.

This could help explain the Aussie Dollar's recent underperformance against currencies belonging to those central banks that have substantially more hikes to deliver over coming months.

The Pound is one of these.

The Pound to Australian Dollar exchange rate (GBP/AUD) rose 5.0% last week, taking it to levels last seen in mid-August at 1.7480.

The gains mean the slump following the UK's mini budget were full reversed and then added to, suggesting a degree of broader Australian Dollar underperformance.

The Pound rallied on Monday after Chancellor Kwasi Kwarteng announced a controversial element to that budget - the abolition of the 45p income tax threshold - would be removed. The market's concerns were not so much about the cost of the tax cut, rather the government's credibility in delivering unannounced tax cuts

The removal of the limit could allow Sterling calmer waters and put the emphasis in GBP/AUD on developments in Australia.

GBP/AUD rose to a high of 1.7480, taking bank account Aussie Dollar payment rates to around 1.6886 and rates offered at independent payment providers to around 1.7320.

Above: GBP/AUD at daily intervals. Set your free FX rate alert here.

For the Australian Dollar to defend current levels the RBA must deliver a 50bp hike and meet market expectations for the scale of future hikes, anything less would represent a major 'dovish' outcome and weigh on the currency.

"The RBA meets tomorrow. Most Economists surveyed expect a fifth 50bps hike to take the cash rate to 2.85%. Cash rate futures implied a smaller expectation at 40bps hike. We opined this may be the last of outsized rate hike as RBA could shift into smaller pace of hike (i.e. 25bps), judging from their recent RBA comments and in light of inflation, wage pressures in Australia," says Christopher Wong, FX Strategist at OCBC Bank.

The shift down in RBA rate hike intentions ultimately denies the Australian Dollar support via the rates channel, allowing the Pound, Euro and U.S. Dollar the chance to consolidate at higher levels.

"With the market about 80% priced for a 50bp rate hike, the focus will be on Governor Philip Lowe’s rhetoric," says Valentin Marinov at Crédit Agricole.

The market is pricing a terminal cash rate at the RBA above 4.00% while Governor Philip Lowe continues to point out that Australia's inflation dynamic is different to that of the US.

According to Lowe, Australia does not face a wage-price spiral like the U.S.

"The risk for the AUD around tomorrow’s meeting is that the RBA hikes by 50bp and signals strongly that it will slow rate hikes at future meetings now that the cash rate is in restrictive territory and given the weakening outlook for global growth and the risks to Australia’s consumption growth due to high levels of household debt and rising living costs," says Marinov.

Crédit Agricole looks for the RBA to hike rates by 50bp on Tuesday to take the cash rate to 2.85% and into modestly restrictive territory.

Recent RBA Minutes, have shown Board members have indicated a growing case for a slower pace of rate hikes as the cash rate increases.

"The RBA’s language around the AUD and how much it is contributing to inflation will be important for investors given that they see this the exchange rate as the pathway for the more hawkish FOMC forcing the RBA to also become more hawkish. The RBA’s language on the currency has been benign and has simply observed its decline against the USD, but its relative stability in TWI terms," says Lowe.

Strategists at JP Morgan meanwhile say the coming hikes from the RBA will be some of the last hikes we will see in this cycle.

"The obvious view is that these CBs coming to the end of their hiking cycles is bearish the currency," says a note from JP Morgan's institutional currency sales desk.

Bill Evans, Chief Economist at Westpac, says he expect the RBA will decide to raise the cash rate by a further 50bps to 2.85%.

But he has strong expectations "the RBA will slow the pace of the tightening at the November Board meeting to 25bps."

This means the peak in the RBA rate will be far lower than that at the U.S. Federal Reserve, creating a dynamic that favours Aussie Dollar weakness.

"The adjustment to the spread is taken in the currency and the margin between US and Australian long term bond rates. Relative to before the US inflation report we have revised down our end 2022 target rate for the AUD from USD0.73 to USD0.65 – a US8c downward revision in the AUD," says Evans.