"There remains uncertainty around the future path of central bank policy rates," NAB.

Image © Adobe Stock

The Australian Dollar was an underperformer among major currencies in the week to Thursday its earlier recovery from undervalued levels would have scope to push GBP/AUD lower and potentially back beneath 1.85 if the rebound renews in either the days or weeks ahead.

Australia's Dollar was little changed against the U.S. Dollar, Japanese Yen and Swiss Franc on Thursday but lower in relation to many other currencies amid further losses for stock and bond markets around the world, while also carrying broad losses for the week overall.

"Aside from any USD weakness, we think the main influences on AUD/USD, namely commodity prices and by extension views on China, argue for more falls," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

"It is possible market participants will have to wait up to another month before receiving details about the Chinese government’s economic stimulus package," he adds.

Central bank interest rate policy in places like the U.S has been widely cited as a driver of exchange rates and financial markets in recent days but the Australian Dollar's week of underperformance also followed closely behind the release of minutes from this month's Reserve Bank of Australia (RBA) policy decision.

Above: Pound to Australian Dollar rate shown at daily intervals alongside AUD/USD.

The record of this month's meeting said "Members reaffirmed their determination to return inflation to target and their willingness to do what is necessary to achieve that," but otherwise gave no direct indication of whether its cash rate would be likely to rise any further in the weeks ahead.

Market-implied measures had suggested an expectation in some parts that the RBA's cash rate would be lifted to 4.75% by year-end but by Thursday the implied level had fallen to 4.5% while the implied rate for the July 04 policy decision had fallen to 4.18% from 4.24% on Monday.

"China’s recovery appears to be stalling, with the anticipated rebound in consumption yet to eventuate, while the tightening in monetary policy (particularly across much of the advanced economies) will negatively impact demand," says Alan Oster chief economist at NAB. "There remains uncertainty around the future path of central bank policy rates."

This week's Australian Dollar losses stalled a June rally in AUD/USD and helped support GBP/AUD around the middle of its two-month range.

Above: Estimates of fundamental or 'fair value' for selected pairs. Source: Pound Sterling Live.

AUD/USD has this week, and meanwhile, slipped back into the realm of undervaluation on the charts.

The buoyancy in GBP/AUD comes against the backdrop of a mixed performance from Sterling after the Office for National Statistics said on Wednesday that inflation remained unchanged at 8.7% in May, and that it rose further from 6.8% to 7.1% once energy, food, and some other prices are set aside.

Market-implied measures of expectations rose to 6% for the year-end period in the wake of this on Wednesday with the latter being above the 5.75% level that was previously priced in for the Federal Reserve in March, and which led to multiple bank failures: The Bank of England raised Bank Rate from 4.5% to 5% on Thursday.

But the author's own modeling suggests GBP/AUD might fall toward 1.85 or below in the days and weeks ahead, while also indicating that AUD/USD would be 'fairly valued' somewhere between 0.6852 and 0.7252, or otherwise around an average of 0.7025.

This modeling combines inflation rates, interest rates and past exchange rates in order to estimate future exchange rates: all interest rates used are those currently established by the respective central banks.

Above: AUD/USD shown at weekly intervals with selected moving averages denoting possible areas of technical support and/or resistance for Australian Dollar.