"We consider the Australian Q3 22 CPI will have more potential to move AUD if it prompts markets to dial back their expectations for RBA rate hikes (1:30am London time)," - CBA.

Image © Newtown Grafitti, Reproduced under CC Licensing.

The Pound to Australian Dollar exchange rate has remained close to six month highs in recent trade but its recovery from the post-referendum lows plumbed in late September has been stalled by a thicket of technical resistances that could keep Sterling contained below roughly the 1.8000 level in the days ahead.

Sterling outperformed all major currencies in what was a favourable market for risky assets on Tuesday but the Pound to Australian Dollar rate was unable to get past a Fibonacci retracement level at 1.7962 on the charts and its 100-week moving-average at 1.8047.

The Fibonacci retracement at 1.7962 is the first in a series of resistance barriers spanning the gap between 1.7962 and 1.8284 that has so far obstructed GBP/AUD's path higher throughout much of October and which could continue stall Sterling's recovery this week.

But the Australian Dollar is also likely to be sensitive to Wednesday's release of Aussie inflation figures for October, which could impact expectations for next week's Reserve Bank of Australia (RBA) interest rate decision.

"The market is comfortably priced for the RBA to lift rates by 25bps at each of the remaining two meeting this year, the first of those to come next Tuesday," writes Patrick Bennett, head of Asia FX strategy at CIBC Capital Markets, in a Tuesday market commentary.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of 2022 downtrend and selected moving-averages indicating possible areas of technical resistance for Sterling. Click image for closer inspection.

Wednesday's inflation data could garner more market attention than usual after the RBA suggested this month that it would be more cautious about raising its interest rate going forward and indicated that it will likely only continue to lift interest rates in standard sized increments of 0.25%.

The RBA had raised its cash rate by half percentage point increments on four consecutive occasions previously when electing in October to lift the benchmark for borrowing costs by a mere quarter of a percentage point to 2.6%.

"We consider the Australian Q3 22 CPI will have more potential to move AUD if it prompts markets to dial back their expectations for RBA rate hikes (1:30am London time)," says Carol Kong, a senior economist and currency strategist at Commonwealth Bank of Australia.

Australia's Dollar ceded ground all other major currencies except the Japanese Yen in October in an underperformance that was potentially a response to the RBA's implicit guidance suggesting that it could be likely to under-deliver against market-implied measures of expectations for its cash rate in the months ahead.

Pricing in part of the interest rate derivatives market has suggested for months on end that some investors anticipate the RBA will eventually lift its cash rate to 4.25%, although Governor Philip Lowe recently implied in parliament that senior policymakers at the RBA do not currently expect to lift the cash rate above 3.5%.

Above: Pound to Australian Dollar rate shown at weekly intervals with Fibonacci retracements of 2022 downtrend and selected moving-averages indicating possible areas of technical resistance for Sterling. Click image for closer inspection.

"Earlier this month the RBA was the first major central bank to return to a more ‘normal’ 25 bps rate hike. Although the Bank had signalled it was considering such a move, in view of the prevalence of high inflation levels, the decision was still a surprise," says Jane Foley, head of FX strategy at Rabobank.

"The market is expecting that the RBA will now stick with 25 bp incremental moves in its November 1 meeting and beyond. This raises the question about the vulnerability of the AUD vs. the USD and other G10 peers. Given our expectation that USD strength is set to persist, we see risk of AUD/USD dipping back a little further in the near-term. However, Australian fundamentals are relatively strongly positioned. We favour the AUD vs. both the EUR and the GBP," Foley wrote in a Tuesday review of the Australian Dollar outlook.

Governor Lowe told the House of Representatives Standing Committee on Economics this month that the RBA's cash rate could be likely to cycle around some number between 2½ and 3½ over the coming years, suggesting a risk of disappointment for the market in the months ahead.

But inflation numbers will be the key determinants of how far the RBA eventually lifts its interest rate in the months ahead including those out this Wednesday.

"Our forecast is still ~in-line with the RBA's Aug-22 SOMP, which 'charted' an implied forecast of ~1.8%-1.9% q/q. This sees the y/y accelerate further to 7.3% (after 6.1% in Q2)," says George Tharenou, an economist at UBS.

"UBS still thinks CPI is unlikely to materially surprise the RBA to the upside, in contrast to global trends," Tharenou said on Tuesday.