GBP/AUD benefits from technical support near 1.8044 But recovery stalled by resistance near 1.82 short-termRisk tilted toward upside heading into festive holidays

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The Pound to Australian Dollar exchange rate has established a foothold above the 1.80 handle over the course of December while continuing to test technical resistance just above the 1.82 level in recent trade and directional risk likely remains tilted toward the upside heading into the festive holidays.

Australia's Dollar would have been the worst performing major currency for the week to Monday if it hadn't been pipped at that particular post by a Pound that notched up losses against all G10 and G20 counterparts in the wake of this month's interest rate decision from the Bank of England (BoE).

Two out of nine members of the Monetary Policy Committee voted to leave Bank Rate unchanged at 3% last week, overshadowing for Sterling a majority vote to raise the benchmark to 3.5% and a policy decision that brings the total 12-month increase to 340 basis points.

That effectively makes for the strongest monetary policy tightening cycle at the BoE since the period between May 1988 and October 1989 when the Minimum Band 1 Dealing Rate doubled from 7.37% to 14.87%, though it was not enough to keep Sterling from falling last week.

"The minutes from the Reserve Bank of Australia’s early December meeting is the only significant local event over the next few weeks (Tuesday)," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

Above: Pound to Australian Dollar rate shown at 4-hour intervals with Fibonacci retracements of early November rally indicating possible areas of technical support. Click image for closer inspection.

"AUD/GBP can fall if the RBA meeting minutes are interpreted as dovish. The next level of downside support is a long way away at 0.5203 [GBP/AUD: 1.9219]," Capurso and colleagues write in a Monday market commentary.

While most Sterling pairs fell heavily ahead of the weekend, declines in the Pound to Australian Dollar rate were limited in what might have been a symptom of an underperformance by the antipodean currency that has persisted throughout the final quarter.

Much about the outlook for GBP/AUD and other Australian Dollar pairs now depends on the message embedded in minutes of December's Reserve Bank of Australia (RBA) monetary policy meeting out on Tuesday, and how financial markets respond to them.

"We continue to see upside risks to terminal rate pricing in Australia, which could drive the currency stronger," says Michael Cahill, a G10 FX strategist at Goldman Sachs, who forecasts the AUD/USD pair to trade between roughly 0.66 and 0.68 over the coming three-to-six months.

The RBA has raised its cash rate at each of its eight meetings since May 2022, taking the benchmark up to 3.1% this month, but has recently sounded a more cautious tone on the outlook for borrowing costs with future interest rate rises closely tied to developments in the labour market and inflation figures.

AUD/USD shown at daily intervals with Fibonacci retracements of April decline indicating possible areas of technical resistance for Aussie while selected moving-averages denote possible support and resistance. 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 global experience has been that inflationary pressures have been stronger and more persistent than expected. Against such a backdrop, it might be argued that our expectation that the RBA will stop tightening at 3.85% will prove optimistic. If wages growth exceeds our forecasts and/or inflation is slower to fall than expected, the RBA may feel it has little choice but to push the cash rate above 4%," says Catherine Birch, an economist at ANZ.

"Relative economics will be a key driver of currency trends over 2023. Currencies such as NZD and GBP are likely to decline thanks to deteriorating economic fundamentals. However, the AUD is likely to appreciate reflecting the absence of recession," Birch and colleagues write in a recent research briefing.

While inflation, employment and other economic fundamentals are likely to remain a key influence on the Australian Dollar and Pound in the year ahead, it's another detail that is likely to matter most for the Pound-Aussie and AUD/USD exchange rates in the week ahead.

This is whether minutes of the December RBA meeting reveal on Tuesday any discussion about the option of leaving the cash rate unchanged in December as that would signal such an outcome is a possibility in forthcoming policy decisions including the one scheduled for February.

If it materialises that this policy option was discussed then it would potentially reinforce the antipodean currency's recent tendency to underperform and could help to support the Pound to Australian Dollar rate above the 1.8044 Fibonacci retracement level that has underpinned Sterling throughout December.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of February sell-off indicating possible areas of technical resistance. 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.