GBP/AUD could slide to 1.72 on hawkish RBA guidanceFaces resistance & could struggle on approach of 1.75Size of RBA’s rate hike & guidance for path ahead keyRBA dominates ahead of UK wage data & BoE decision

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The Pound to Australian Dollar exchange rate entered the new week close to some of its lowest levels since 2019 and would be at risk of slipping back to 1.72 in the week ahead if Tuesday’s Reserve Bank of Australia (RBA) policy decision provides the Antipodean currency with a further tailwind.

Australia’s Dollar has outperformed all other major currencies with the exception of China’s Renminbi in recent trading sessions following a cocktail of favourable developments including an easing of coronavirus-related restrictions in China and stronger-than-expected Australian GDP data.

“This was the third consecutive weekly gain for A$, backed by resurgent energy prices and periods of improved risk appetite. The latter is to some degree attributable to China’s reduced Covid case numbers, which state media is touting but more tangible are looser activity restrictions in major cities, notably in Beijing and Shanghai,” says Sean Callow, a senior FX strategist at Westpac.

“But there will still be considerable tension around the RBA decision on Tuesday at 2:30pm AEST. Westpac expects a 40bp increase in the cash rate to 0.75%, but forecasters are very divided – about half expect 25bp and the rest are split between 40bp and a handful for 50bp. Market pricing is skittish around +30-35bp. The wording of the statement will also be closely noted, though there will not be new forecasts,” Callow also said on Monday

Australia’s economy grew by 0.8% during the first quarter, official figures revealed last week, and when economists were looking for only a 0.6% increase while some of the details in the report were potentially bright enough to have influenced RBA thinking on interest rates.

Above: Pound to Australian Dollar rate shown at 4-hour intervals. Click image for more detailed inspection.

Economists at ANZ said following last Wednesday’s data that it was indicative of average hourly wage growth running ahead of Reserve Bank of Australia expectations, which is something that could impact the pace at which it lifts the Aussie cash rate as soon as this Tuesday.

“We expect a 25bp increase in the cash rate to 0.60%. But we would not be surprised if a 40bp increase is delivered,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

“AUD/USD broke above resistance near 0.7200 last week. The improving global outlook and recovering CNH suggest AUD/USD can increase this week though it could be a choppy increase. The next major resistance level is 0.7414,” Capurso and colleagues said on Monday.

Capurso and the CBA team look for Tuesday’s increase in the cash rate to surprise on the downside of market expectations for a 0.4% increase that would take the benchmark up to 0.75%, although they also look for the U.S. Dollar to extend its recent declines through the week ahead.

Above: AUD/USD shown at daily intervals with selected moving-averages as well as Fibonacci retracements of February 2021, early and mid-April downtrends highlighting various technical resistance for Australian Dollar. Click image for more detailed inspection.

The net effect for AUD/USD, they suspect, is likely to be one of modest gains that would potentially weigh further on the Pound to Australian Dollar exchange rate over the coming days.

GBP/AUD is sensitive to price action in AUD/USD and always tends to closely reflect the relative performance of Sterling and the Aussie when each is measured against the U.S. Dollar.

“We think the strength of the price and wage measures in the GDP data should be enough to convince Governor Lowe that, “there is a very strong argument” to deviate from a regular 25bp move and lift the cash rate a little bit faster,” says Felicity Emmett, an economist at ANZ.

“We think the fact a 40bp move was discussed in May makes it a more likely choice. More than 50bp seems unlikely given that the RBA meets monthly. We can’t rule out the RBA sticking with a cautious approach and tightening by 25bp, but with policy still exceptionally stimulatory we think a bigger move of 40bp is more likely,” Emmett and colleagues said on Monday.

Above: Pound to Australian Dollar rate shown at daily intervals. Click image for more detailed inspection.

Tuesday’s RBA policy decision is the highlight of the week ahead for the Australian Dollar and a period that is devoid of major appointments for Sterling.

However, employment and wage data due out from the UK early next week will be important for Sterling and the Pound to Australian Dollar rate because it could potentially have knock-on implications for the Bank of England inflation outlook and interest rate stance as soon as June 16.

But for the days ahead much about GBP/AUD price action will be determined by the size of the RBA’s Tuesday increase in interest rates and its guidance about the likely pace and scale of any additional moves in the months ahead.

“Westpac’s expected 40bp hike to a 0.75% cash target is now the market median although pricing for that outcome was pared back slightly late last week after a key media report talked about a series of 25bp rate hikes. There are a number of forecasters looking for that outcome, but also some credible analysts calling for 50bp,” says Damien McColough, Westpac's head of rates strategy.

“So the RBA will be in a position to resolve some uncertainty tomorrow and significantly influence and perhaps significantly revise expectations. If our forecast proves to be correct then we would expect forward cash pricing for end-2022 to remain about the same,” McColough also said on Monday.