GBP/AUD steadies amid AUD/USD reboundAUD/USD pares losses amid USD correctionBut AUD/USD’s RBA handicap set to persistGBP/AUD supported near 1.8904 on charts

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The Australian Dollar is in the process of putting a "grim" January behind it say analysts, although for now the Pound looks to be weathering the antipodean's comeback.

The Pound to Australian Dollar rate stabilised during the midweek session even as the highly influential AUD/USD headed for its third consecutive gain, potentially indicating that Sterling could be likely to retain an upside bias in the days and weeks ahead.

Australia’s Dollar reversed more than half of its January decline against the U.S. Dollar during the opening half of the week that left GBP/AUD clutching for support just beneath the 1.90 level.

But GBP/AUD edged higher on Wednesday even as AUD/USD advanced further in price action that may have had more to do with investors’ appetite for the U.S. Dollar than anything happening down under in Australia.

“AUD and NZD are continuing to show the biggest reactiveness to equity dynamics and are rebounding strongly after a grim second half of January, also thanks to their quite stretched net-short positioning,” explains Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

"The antipodeans’ strength seems to suggest that position-squaring is indeed behind this week’s dollar weakness, and we expect the dollar’s positioning now to have reached a somewhat more balanced level which can allow for some stabilisation," Turner and colleagues said on Wednesday.

Above: GBP/AUD shown at daily intervals alongside AUD/USD. Fibonacci retracements of December’s rally indicate possible areas of support for Sterling.

GBP/AUD reference rates at publication:

Spot: 1.9038High street bank rates (indicative band): 1.8366-1.8499Payment specialist rates (indicative band): 1.8860-1.8937Find out about specialist rates, hereSet up an exchange rate alert, hereAustralia’s Dollar had been one of the most heavily sold major currencies in January when stocks and other risk assets weakened broadly across the globe in what appeared to be a market response to the increasingly hawkish monetary policy stance of the Federal Reserve.

It was also one of the bigger fallers in the six months up to January as the Fed prepared U.S. companies, households and global financial markets for a normalisation of its monetary policies, which got underway in November with a winding down of the bank’s quantitative easing programme but is expected to continue with an increase in U.S. interest rates as soon as March.

“We’ve long railed against where markets were pricing the terminal rate and argued that a repricing there should be one of the major reasons for the next leg higher for the USD. But Bullard and George’s comments suggest to us that this reason might need to be shelved in the near-term. Also, the long USD view is already too consensus,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

“As such, we now have the USD consolidating in the near-term. Whether this morphs into outright USD selling pressure will depend largely on how well the ECB can push back against hawkish expectations tomorrow. If you want a near-term tactical idea that makes sense – look at +AUD/USD of +NZD/USD ideas,” Rai and colleagues said in a Wednesday market commentary.

Above: AUD/USD shown at daily intervals alongside U.S. Dollar Index. Fibonacci retracements of November’s sell-off indicate possible areas of technical resistance to a further Aussie Dollar recovery.

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It’s possible, if not likely, that this week’s Australian Dollar rally resulted more from investors taking profits on wagers in favour of the U.S. Dollar than any market rethink of the large bets built up against AUD/USD last year due to the Reserve Bank of Australia’s (RBA) monetary policy stance.

Strength in the U.S. Dollar has been a significant factor behind recent declines in AUD/USD, but weakness in the Australian Dollar has also been at play too and results in large part from the RBA’s assessment that Aussie inflation pressures are not yet acute enough to merit an increase in its own cash rate rate any time in near future.

This position was reiterated again on Wednesday by RBA Governor Philip Lowe.

“I recognise that in a number of other countries the ending of the bond purchase program has been followed closely, or is expected to be followed closely, by an increase in the policy rate. This is in contrast to earlier episodes of quantitative easing and reflects their current circumstances, which are quite different from our own,” said Governor Philip Lowe, in a Wednesday address to the National Press Club of Australia.

“While inflation has picked up in Australia, it remains substantially lower than the 7 per cent rate in the United States, 5.4 per cent in the United Kingdom, and 5.9 per cent in New Zealand, and it has not been accompanied by strong wages growth as is the case in the United States and the United Kingdom. These are important differences,” Governor Lowe also said.

Source: Reserve Bank of Australia.

"The meeting yesterday and the speech today reaffirmed our expectation that the RBA will begin hiking the cash rate this August," says Besa Deda, Chief Economist at St.George Economics.

"Since the start of the pandemic, the RBA has repeatedly underestimated inflationary pressures. In our view, the risks to the RBA’s inflation forecast are, again, tilted to the upside," he adds.