GBP/AUD: Central bank divergence put to the test as risk laden week begins

• The BoE may be shifting towards cutting rates as the RBA continues to hike
• The event risk for GBP/AUD is significant for both currencies this week
• GBP/AUD has broken its 200-day moving average

Despite a noticeable dovish shift from a senior Bank of England (BoE) policymaker just as the Reserve Bank of Australia (RBA) resumed its tightening cycle for the first time since May, GBP/AUD managed to climb last week. And not just by a little but a lot, taking the pair through its 200-day moving average for the first time since September. With plenty of major data and central bank speeches scheduled in the UK and Australia this week, the next few days may prove to be critical for the medium-term trajectory of the pair heading into 2024.

First cracks in central bankers’ higher for longer narrative

Central bankers from most parts of the developed world have spent 2023 pushing back against market pricing looking for steep rate cuts in 2024, signalling, at least in public, that interest rates are likely to remain higher for longer to snuff out the threat posed by entrenched inflation.

But that near universal mindset came to a shuddering end last week with Huw Pill, the BoE’s chief economist, breaking ranks with the crowd by suggesting it does not seem totally unreasonable that the bank may be reconsidering its rate outlook by the middle of next year. While he attempted to walk the remarks back a day later, it came across as a rare slip when policymakers say the quiet part out loud.

Before Pill’s spill, the RBA did what most economists and traders thought was the right decision following a hot consumer price inflation report for the September quarter by lifting Australia’s cash rate by 25 basis points to 4.35%. It also retained a tightening bias indicating rates may need to rise further, even if there was some debate as to how realistic that threat may prove to be.

So, on one hand, we have a central bank seemingly at the end of its tightening cycle and one that’s just restarted it. That scenario makes for an interesting week with major data and central bank speeches tta could easily augment the current status quo.

Event risks loom for GBP/AUD

In Australia, the week will be all about wage pressures and labour market conditions, putting the RBA’s updated forecasts released on Friday to the immediate test. Tuesday brings the monthly NAB business survey with plenty of lead indicators on wage and inflationary pressures, along with business investment and demand. Wednesday well deliver official wages data for Q3 and will likely show a record increase for the period. Thursday rounds out an important data week with unemployment data for September, providing scope on how persistent current wage pressures may prove to be.

Outside Australia, China’s ‘data dump’ consisting of monthly readings on retail sales, industrial output and fixed asset investment on Tuesday may also be influential on the AUD’s performance against the US and crosses given many investors still like to use the currency as a proxy for broader China sentiment.

Over in the UK, unemployment arrives on Tuesday, inflation data on Wednesday and retail sales on Friday. The inflation report will show a big drop in the annual rate as a hot monthly reading from 2022 drops out, emphasising the importance of keeping a track of developments in underlying price pressures. There are also numerous speeches from BoE officials scheduled, creating the opportunity to see whether other MPC members may be falling in line with Pill’s thinking last week.

Upside GBP/AUD momentum remains

When you consider the context of the situation and the busy events calendar, one look at the GBP/AUD daily chart shows this week could easily set the trajectory for the pair heading into 2024. Having broken through the 200-day moving average, the question this week may answer is whether the pair will stay there?

If yes, traders will be looking at resistance located above 1.9340 as the first port of call, with success there likely to put 1.9500 in focus. But should the 200DMA fail to hold, a return to strong support located around 1.8960 appears likely. Right now, with MACD and RSI trending higher, momentum is working in favour of the former right now.

-- Written by David Scutt

Follow David on Twitter @scutty