• GBP/AUD potentially on cusp of break higher on charts
• With possible scope for levels above 1.84 in short-term 
• Interest rate decisions from Fed,BoE pose upside risks 
• Quiet AU calendar sees AUD surf global market waves   

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The Pound to Australian Dollar exchange rate entered the new week on the front foot but with Federal Reserve (Fed) and Bank of England (BoE) interest rate decisions still looming ahead the risk is of GBP/AUD rising further in a possible upward breakout on the charts over the coming days.

Australia's Dollar entered the new week near the bottom of the G10 currency league table and remained an underperformer even after the U.S. Dollar turned lower following the North American open on Monday with the net effect being an added tailwind for an ongoing rally in GBP/AUD.

GBP/AUD rose by around one percent with the help of broad gains by Sterling as global market digested weekend developments including a state-orchestrated takeover of Credit Suisse by UBS and coordinated action by central banks seeking to improve the availability of U.S. Dollars in the financial system.

"This week's Fed dot-plot may shape up to be the most important one of the year. We expect them to leave the terminal rate unchanged in light of recent events but to cluster and remain elevated in 2024," says Mazen Issa, a senior FX strategist at TD Securities. 

"The Fed could be forgiven if they opted to hold. At this point, we think the likelihood of a hard landing has increased even if banking system pressures alleviate. This is because the cost of credit and access to credit will become more stringent," Issa adds in Monday market commentary.

Above: Pound to Australian Dollar rate shown at daily intervals with Fibonacci retracements of rally beginning on February 07 indicating possible areas of technical support, and shown alongside AUD/USD. Click image for closer inspection. 

Last week's bonfire of banking stocks was an instrumental driver of the state-brokered sale of Credit Suisse at the weekend and the market concerns that motivated the sell-off are a curveball for the Fed and BoE in their March interest rate decisions this week. 

Financial markets have revised down their implied expectations for the Fed's interest rate this year as result and to such an extent that Wednesday's decision is seen as being a close call in relation to whether the Federal Open Market Committee will even raise borrowing costs at all. 

"We continue to expect the FOMC to increase the Funds rate by 25bp. By comparison, Funds rate futures are pricing 15bp. Important for the USD’s reaction to the FOMC meeting will be the dot plot on the Funds rate, FOMC members’ forecasts for inflation, and how much weight chair Powell gives to the recent issues in regional banks," says Kristina Clifton, a senior economist and currency strategist at Commonwealth Bank of Australia.   

"We expect the USD to lift if the inflation forecasts or the Funds rate forecast are increased materially.  We expect Powell to downplay the impact of the small banks problems," Clifton and colleagues write in a Monday research briefing. 

The outcome of Wednesday's Fed decision matters greatly for the U.S. Dollar as well as all other currencies and could potentially lead GBP/AUD to break decisively above its 200-week moving average around 1.8230 on the charts.

Source: Commonwealth Bank of Australia Economics and Global Markets Research. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Sterling tends to have a negative correlation with AUD/USD and an often-positive correlation with measures of the U.S. Dollar so could be likely to rise further if the Fed raises interest rates on Wednesday, and recent inflation figures from the U.S. are among the reasons for why the bank might still go that route.

The author's model suggests GBP/AUD could trade briefly above 1.84 up ahead, which would mark a substantial reversal of the losses sustained following Russia's invasion of Ukraine last year, while the above circumstances are exactly the kind that might be likely to see GBP/AUD rise. 

Such an outcome would potentially create scope for a higher medium-term trading range too but much about the outlook for Sterling depends on Thursday's Bank of England interest rate decision. 

"Our economist expects the Bank of England to deliver one final (25bp) hike this week, with the market now heading into this MPC meeting expecting the lowest amount of additional tightening since way back in early 2021," says Shreyas Gopal, a strategist at Deutsche Bank. 

"And with UK financial conditions not having tightened as much as in the Euro Area and the US following the recent banking stresses, tightening policy above what's priced ought to still play positive for the currency. We continue to favour sterling higher against the Swedish krona and US dollar," Gopal adds. 

Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

The consensus among economists favours another increase in Bank Rate from 4% to 4.25% on Thursday but the market-implied measures of expectations suggest that investors have all but given up on this idea since the various bank failures in the U.S. and Europe this month.

This means Sterling might benefit notably if an increase in Bank Rate is actually delivered and losses could be limited if Bank Rate is left unchanged, although Thursday's decision will also depend in large part on Wednesday's UK inflation figures and what the BoE makes of last week's budget. 

Consensus suggests that UK inflation fell from 10.1% to 9.9% last month in line with BoE forecasts while the budget led the Debt Management Office (DMO) to estimate a 2023/24 public borrowing requirement that is higher than that expected in the wake of last September's 'mini budget.'

"This had no major market impact, with a generally more positive feeling for the economy predicted going forward," says Sebastian Steyne, an FX risk and hedging specialist at Sable International. 

"We have a big week on the data front, with UK inflation out on Wednesday – here we expect a drop in the year-on-year number, but an increase in the month-on-month number, as we have seen across the globe. This is no major shock as we are coming off a very high base and prices can only continue to drop for so long," Steyne writes in a Monday research briefing. 

Above: Pound to Australian Dollar rate shown at weekly intervals with selected moving averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.