"Australian CPI tends to be much more correlated with the US CPI" - ANZ.

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Australian Dollar losses and a rally by Sterling have lifted GBP/AUD near to its coronavirus crisis highs and few, if any, analysts expect this week's Reserve Bank of New Zealand (RBNZ) interest rate decision or speech from Reserve Bank of Australia (RBA) Governor Philip Lowe to overturn the apple cart anytime soon.

Losses pushed the Australian Dollar close to the bottom of the G10 league table on Tuesday as a rally by the Pound also helped lift GBP/AUD to its highest since April 2020 following after the Office for National Statistics (ONS) reported an increase in UK unemployment for the month of May and a continued high level of wage growth.

"The UK is in a wage‑price spiral. Wage growth feeds off high inflation, and inflation feeds off high wage growth," writes Joseph Capurso, head of international economics at Commonwealth Bank of Australia, in a note ahead of the release.

"Wage growth will need to ease in a range of 3%‑4% to sustainably bring inflation down to the Bank of England’s 2%/yr," he and colleagues add.

Above: Pound to Australian Dollar rate shown at weekly intervals alongside spread or gap between 02-year UK and Australian government bond yields. Fibonacci retracements of 2020 downtrend in orange and indicating technical resistance for Sterling.

Growth in the average pay packet rose from an annual 6.7% to 6.9% in the three months to the end of May if bonuses are included and remained at 7.3% when bonuses are excluded as the unemployment rate climbed from 3.8% to 4% with all outcomes overshooting the consensus among economists.

"In the face of these inflationary pressures, monetary policy has been tightened. Over the last twenty months, we have raised Bank Rate by nearly five percentage points. Some of

that tightening is still to come through the policy pipeline," Bank of England Governor Andrew Bailey said in a speech on Monday.

"We expect underlying inflationary pressures to recede as headline inflation falls. But the Monetary Policy Committee is monitoring developments – in particular, those in the labour market, in wage growth and in services price inflation," he added from Mansion House in the City of London.

Rising wage growth is an example of the kind of thing that leads economists and financial markets to anticipate higher inflation and interest rates, which have been raised from 0.1% to 5% since December 2021 and during the course of the BoE's effort to bring inflation back to the 2% target level in the UK.

Above: Pound to Australian Dollar at daily intervals alongside GBP/USD (black) and AUD/USD (blue).

All of the above factors have recently been cited for lifting UK government bond yields to new millennium highs relative to those in Australia, while this spread or gap is often said to be one the most important influences on exchange rates.

GBP/AUD, however, tends to most closely reflect the relative performance of Sterling and the Aussie when each is measured in relation to the U.S. Dollar.

"The good news is that China’s slowdown is having a negative influence on global goods inflation, which is helping to drive headline inflation rates down across many economies," says Briant Martin, head of G3 economics at ANZ.

"That said, the Australian CPI tends to be much more correlated with the US CPI, so beyond the initial goods prices impact it’s unlikely that policymaker concerns about services price stickiness will quickly fade despite signs of deflation in China," he adds.

Above: Pound to Australian Dollar shown at monthly intervals alongside spread or gap between 02-year UK and Australian government bond yields.

Tuesday's price action in GBP/AUD comes ahead of July's rate decision from the RBNZ and a speech from RBA Governor Philip Lowe relating to a recent review of its policy.

"In a media briefing in April after the RBA Review was released, the Governor noted that ‘the Board will consider these issues [raised by the RBA Review] over coming meetings’ and that the RBA would publish a detailed response ‘later this year,’ Commonwealth Bank of Australia's Capurso and colleagues say.

"While it may be too early for such a detailed response, the speech will likely be an important guide on the direction in which the RBA will be heading," they add.

The speech is set to be made at the Economic Society of Australia Business Lunch, in Brisbane around 04:00 London time and comes barely more than a week after the RBA left its cash rate unchanged at 4.1% for the month of July.