GBP/AUD extends decline from recent highsAUD supported by improved global sentimentAs investors cheer U.S. debt newsBut Aus retail sales disappoint ahead of midweek CPI release

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The Australian Dollar extended a month-end rally after global investor sentiment received a shot in the arm on news the U.S. government will likely borrow less over the coming funding period.

However, gains for the currency might have been greater were it not for domestic news that retail sales suffered a larger-than-expected decline in December.

Australian retail sales fell a sizeable 2.7% month-on-month in December, and there was more disappointment as the November figure was revised down to +1.6% m/m, from +2.0% previously, leaving sales just 0.8% higher year-on-year in December.

The softness speaks of the difficulties facing consumers amidst historically elevated inflation and interest rates, and will give the Reserve Bank of Australia reason to consider cutting interest rates at some point in the coming months.

Should rate cut bets grow, the Aussie can come under pressure. All eyes now turn to Wednesday's crucial quarterly inflation release, which will likely improve visibility on the RBA's rate path.

But for AUD, it could be the global picture that trumps domestic developments and offers support heading into February.

U.S. bonds rallied - a sign of easing concern for the U.S. debt trajectory - after the Treasury lowered its quarterly borrowing estimate for January-March from $816BN to $760BN.

This was "a larger decline than expected by the market and our U.S. rates strategists," says Jim Reid, a macro strategist at Deutsche Bank. "These estimates suggest an improvement in the Treasury’s expectation of the budget deficit path."

U.S. stocks rose in response, as did risk-sensitive currencies, like the Australian Dollar, New Zealand Dollar and Canadian Dollar, betraying a risk-on setup in global FX.

"This news really helped markets into the close with the S&P 500 gaining nearly half a per cent in the final hour of trading," says Reid.

The U.S. Treasury also announced a modest $202BN borrowing estimate for the Apr-Jun period.

"The market will next be watching the details of the Treasury’s coupon auction sizes in tomorrow's refunding statement. Recall that the last quarterly refunding announcement on 1 November marked the start of the dramatic bond rally into year-end," says Reid.

This year-end bond rally was associated with a sizeable rise in the Australian and New Zealand Dollars, which puts us on notice for any further strength that might follow Wednesday's announcement.

The Pound to Australian Dollar exchange rate is down by 0.14% at the time of writing at 1.9198, the Australian to U.S. Dollar exchange rate was higher on the day at 0.6610.