GBP/AUD is fairly valued anywhere between 1.7526 & 1.8169AUD/USD undervalued with short-term 'fair value' near 0.7132 GBP/AUD could struggle to exceed 1.79 much in week aheadU.S. job numbers & economy surveys the main data highlights

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The Pound to Australian Dollar exchange rate entered the New Year trading on the front foot but inflation differentials suggest that it's fairly priced anywhere between 1.7526 and 1.8169 while the ongoing undervaluation of AUD/USD is a possible limit on the upside for GBP/AUD up ahead.

Sterling opened a holiday-shortened week on Tuesday with strong gains over the Australian Dollar and some other currencies when the return of European traders to market was followed by widespread gains for what are now broadly overvalued U.S. Dollar exchange rates.

Australian Dollar losses came amid widespread gains for stock and bond markets and against a backdrop of outperformance by the Japanese Yen and Chinese Renminbi in the currency market to open the new week.

"Yen strength likely reflects the market placing a higher probability that the BoJ is at the start of a new monetary policy regime," writes Michael Cahill, a G10 FX strategist at Goldman Sachs, in a Tuesday market commentary.

"Financial conditions have tightened by 40bp since the December FOMC meeting however the broad Dollar has weakened, partly because of idiosyncratic developments in China and Japan," he adds.

Above: Pound to Australian Dollar rate shown at daily intervals alongside AUD/USD. Click image for closer inspection.

Tuesday's pick up in risk appetite appeared connected with China's abandonment of attempts to contain the coronavirus and pivot to redeploying the full productive capacity of its economy announced over the festive holiday.

"The implications for the global inflation picture are mixed," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

"Yes, you should see demand for commodities/goods increase, but how does that square with tighter financial conditions? Also, while this is bullish news for supply chains, that story is largely in the price," he adds.

"In 2023, the focus should turn to liquidity – both from a macro level, and within banking systems as key drivers for broad risk, funding and FX. My bias is to fade rallies in the USD, and position for a broad rally in risk next year. This is tied to our view on the liquidity backdrop," he adds.

While Asia Pacific factors may have been prominent influences on price action on Tuesday, the remainder of the week is likely to see a keen focus on economic data emerging from the U.S. where industry surveys and the latest job report could impact expectations for Federal Reserve (Fed) policy.

Above: Pound to Australian Dollar rate shown at weekly intervals. 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.

"After a few weeks of dull, sideways drift in the USD, the strong start to the new calendar year for the USD is very much in keeping with long (and shorter) term seasonal trends which typically see the USD rally in January," writes Shaun Osborne, chief FX strategist at Scotiabank, in a Tuesday market commentary.

Despite this, it's not clear what the implications are for the U.S. Dollar given that inflation and interest rate differentials suggest it is overvalued against many currencies with AUD/USD undervalued while below 0.7132 and GBP/USD undervalued below 1.25, for instance.

Meanwhile, using the latest inflation and cash rate differentials to deflate from a January 2022 starting level around 1.8731 suggests that a fair short-term value for GBP/AUD would be somewhere between 1.7526 and 1.8169 over the coming days and weeks.

The upper end of that range would most likely be seen in market conditions where U.S. Dollar exchange rates are rising and vice versa.

"The latest poisoning data revealed that real money investors added to AUD shorts at the fastest pace in two months into year-end," says Jeremy Stretch, a CIBC colleague of Rai, writing in a Tuesday commentary.

"The bias towards extending shorts comes as the AUD has proved to be negatively impacted by a slide in final manufacturing PMI allied to the continued contraction in the comparative Chinese data series," he adds.