GBPAUD uptrend remains intactFurther gains towards 2.0 possibleBut technical resistance at 1.9230 key near-termFailure here could result in multi-day retreatChinese inflation disappoints at start of weekWatch UK labour market data for guidance on Tuesday

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The Pound to Australian Dollar exchange rate (GBPAUD) remains near a 38-week high that can be tested and broken again this week, but we are aware of the prospect of a retracement as the dominant uptrend looks due a pause, with UK wage figures being one potential trigger.

GBPAUD rallied to 1.9281 last week with charts showing this to be a new 38-week high as a trend of appreciation remains intact amidst a broader rally in the British Pound linked to elevated UK interest rate expectations.

An assessment of the technical setup is positive and suggests those with AUD purchase requirements would find some value in holding out for further strength over a three-month timeframe. But some near-term caution is warranted as Tradingview charts show this week presents a key technical challenge for GBPAUD.

Charts show 1.9230 as a major technical milestone of interest that has been the scene of technical breakdowns and trend reversals in the past. For the uptrend to extend we are looking for a daily close above this level:

Above: GBPAUD at daily intervals showing resistance at 1.9230.

If this level breaks the post-covid 2020 highs towards 2.0 are possible over the coming weeks.

But failure here could result in a retreat. Studies show that pullbacks in GBPAUD have become quite deep since March, creating some white-knuckle moments for those requiring GBPAUD upside.

One risk to consider on a one-month timeframe is another such retracement developing if UK data disappoints.

Risks to GBPAUD will be the July 11 labour market report and the July 29 inflation report.

The August 01 Bank of England meeting is another risk to be wary of if the BoE pushes back against elevated rate hike expectations.

Disappointing data and a 'dovish' BoE could have a material downward pull on GBP, so reducing some exposure to GBPAUD with these dates in mind could be prudent.

However, with UK inflation running hot and the UK labour market remaining tight, the odds of a trend-turning event still look premature for July, although this could be a feature for later H2.

From an Australian Dollar perspective, AUD remains undermined by a stop-start approach to interest rates by the Reserve Bank of Australia (RBA).

The RBA opted to keep interest rates unchanged last week, disappointing a market that saw near-50/50 odds for a second consecutive hike following June's decision to raise rates 25 basis points.

Interest rate differentials matter greatly for currencies in the current environment and markets are betting the RBA is close to ending its cycle which suggests the peak in the base rate will be lower than in some key trading partners, undermining AUD from a rates perspective.

AUD is also highly sensitive to China where economic growth momentum continues to disappoint, weighing on global commodity prices.

"The fundamental weight on AUD remains lower commodity prices in the absence of an economic stimulus package from the Chinese government. We expect the darkening global economic outlook and a stronger USD to push AUD/USD down to around 0.6600 this week," says Carol Kong, a foreign exchange strategist at Commonwealth Bank of Australia.

Above: AUDUSD at daily intervals.

Such a move in AUDUSD would be consistent with further strength in GBPAUD, all else being equal.

Sluggish growth in the world's second-largest economy was underscored on Monday after China reported flat inflation figures for June, whereas the market was looking for inflation to rise 0.2% year-on-year.

Core CPI inflation further fell to 0.4% y/y and further deflationary readings are likely as producer prices of consumer goods read at ‑0.5% y/y.

Headline PPI fell deeper into negative territory at ‑5.4% y/y in June thanks to lower commodity prices and renewed weakness in China's property sector, according to Commonwealth Bank of Australia analysts.

"The inflation figures point to soft domestic demand and open the door to more monetary easing," says CBA's Kong.

CBA predicts the People's Bank of China will cut the 7‑day reverse repo rate and the one‑year Medium‑term Lending Facility (MLF) rate by at least 10bp this quarter. The Reserve Requirement Ration (RRR) will also likely be cut.

"The risk of deflation is high if the government fails to provide support in our view," says Kong.

Speculation of a broader economic stimulus plan being announced by the government remains high, a development that could potentially boost the Aussie Dollar.

However, this could yet provide a headline-driven knee-jerk reaction in China-linked currencies, such as the Australian Dollar, as stimulus announcements have thus far failed to translate into sustained economic momentum.