GBP/AUD struggling for traction & stymied by 1.78Risking slippage below 1.75 if AUD/USD finds feetQ1’s wage data & RBA policy implications in focus May see AUD/USD stabilise & suppress GBP/AUD

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The Pound to Australian Dollar exchange rate has rebounded off its early May lows during recent weeks but has met tough resistance near the 1.78 level on the charts, which could continue to bar Sterling’s path higher in the days ahead and during what is an important week for Australian economic data.

Sterling climbed tepidly against most major counterparts including the Australian Dollar before its path higher was road blocked by a notable Fibonacci retracement level around 1.78 on the charts for a fifth time.

GBP/AUD was turned away from 61.8% retracement of its mid-April fall as the Aussie found its feet in the wake of a turbulent start to the week that saw many China-linked currencies coming under pressure when Chinese economic figures revealed the cost of the recent ‘lockdowns’ in the country.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of mid-April fall indicating various areas of short-term technical resistance for Sterling and support for the Aussie. Click image for closer inspection.

“Economic activity in China took a big hit in April because of the country’s Covid zero goal. Industrial production plunged by 7.1%/mth, retail sales contracted by 0.7%/mth and fixed asset investment fell by 0.8%/mth,” says Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.

“AUD/USD and NZD/USD fell briefly by over 1% following the disappointing set of Chinese economic data. The unfavourable global economic growth outlook will continue to weigh on AUD and NZD,” Haddad also said on Monday.

Steep falls in retail sales and industrial production painted the current quarter as a write-off for Australia’s largest trade partner but more important for the Chinese economic outlook were the weekend’s reports suggesting that Shanghai could be likely to begin a phased reopening over the coming days.

While other areas of China including the capital Beijing remain subject to varying degrees of restrictions, the reopening of Shanghai is a significant development for the global economy given the city is also home to world’s busiest container port trade in manufactured goods.

This potentially means that recently renewed disruptions of international supply chains will be tempered in the weeks ahead, which would be balm for the international trade sector and a helpful development for the Australian Dollar.

“A strong US dollar, China's ongoing Covid lockdowns and equity fragility will remain key in the week ahead. But there is also important local data,” says Sean Callow, a senior currency strategist at Westpac.

“Westpac looks for the wage price index to have risen 0.8%qtr, 2.5%yr in Q1. This is still well below the RBA’s preferred pace of the mid-3% area, but is a somewhat slow-moving survey,” Callow added in a Monday research note.

Above: AUD/USD shown at daily intervals alongside Renminbi-Dollar rate. Click image for closer inspection.

While international developments have been important influences on the Australian Dollar and GBP/AUD in recent trading, the week ahead will also see market attention turn to the release of the first quarter wage figures, which could impact the Reserve Bank of Australia (RBA) interest rate outlook. (Set your FX rate alert here).

The market will look at the data for signs of a pick up in pay pressures as these would indicate that recent increases in inflation may be more durable than previously thought by RBA policy makers, and so could in turn influence whether the bank lifts its cash rate by 0.25% or 0.40% in June.

“An increase in line with our expectation of 0.8% q/q will likely see the RBA sticking with Governor Lowe’s comment last week that it is not inclined to “deviate” from moves of 25bp in coming months,” says David Plank, head of Australian economics at ANZ.

“A jump of 1% q/q or more will, however, indicate that the acceleration in wages growth came earlier than indicated by the RBA’s business liaison talks and so likely has more momentum. In which case, the prospect of a move of 40-50bp in June increases materially,” Plank and colleagues said Monday.

The Australian Dollar could potentially benefit to the detriment of GBP/AUD this week if the wage report suggests the cash rate is more likely to be lifted to 0.75%, given that pricing in the overnight-indexed-swap market indicated on Monday that investors expect it to rise to only a little more than 0.60%.

This is one reason why the Pound to Australian Dollar rate could be likely to remain road blocked by the 1.78 level over the coming days.

Above: Expectations for RBA cash rate implied by overnight-index-swap market. Source: Westpac.