GBP/AUD testing key support near 1.8805With rallying AUD/USD eyeing 2022 highsGBP/AUD losses could fade around 1.8679If AUD/USD holds below 0.7315 Jan high

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The Pound to Australian Dollar rate was testing a notable technical support level around 1.8805 ahead of the weekend amid an ongoing rally by the antipodean currency, although any losses below this level could be quite limited over the coming days.

GBP/AUD was headed for a fourth consecutive daily decline as it tested an important level of support around 1.88-5 on the charts, with losses building as a result of a more widespread recovery in Australian exchange rates.

Australia’s Dollar was the second best performing major currency within the G10 contingent for the week to Thursday having been outpaced only by its Kiwi counterpart in a rally that lifted the important and highly influential AUD/USD pair back above 0.72 in the penultimate session of the week.

“AUD/USD has generally been on an upward path so far this week. The calmer equity markets and an easing of geopolitical tensions likely underpinned AUD. So did the recovery in the Australia minus US 10 year bond yield spread. We expect AUD/USD to drift a little higher if global equity markets keep lifting, though AUD may find some resistance around 0.7300,” says Carol Kong, a currency strategist at Commonwealth Bank of Australia.

This week’s rally saw AUD/USD testing the 78.6% Fibonacci retracement of its January decline on the charts Thursday, which is located at 0.7240 and is reinforced as a technical resistance barrier by the nearby 100-day moving-average at 0.7247.

Above: AUD/USD shown at daily intervals. Fibonacci retracements of January decline indicate possible areas of technical resistance to a further AUD/USD recovery. Selected moving-averages also indicate possible areas of resistance.

GBP/AUD reference rates at publication:

Spot: 1.8817High street bank rates (indicative band): 1.8158-1.8290Payment specialist rates (indicative band): 1.8650-1.8723Find out about specialist rates, hereSet up an exchange rate alert, hereShould the Aussie extend its rally above those levels then the support level underpinning the Pound to Australian Dollar rate around 1.8805 could fail, leaving it at risk of a deeper setback over the course of next week.

Whether or not the Aussie can stage a recovery above 0.7240 to 0.7250 area this week could depend to some extent on the market’s response to testimony from Reserve Bank of Australia (RBA) Governor Philip Lowe who’s set to appear before the House of Representatives Standing Committee on Economics around 22:00 London time on Thursday.

“We continue to favour holding longs and adding on any weakness. RBA Governor Lowe’s appearance before the House of Representatives Committee tomorrow will be perused for policy signals, though the governor is unlikely to stray from his position of exercising patience,” says Patrick Bennett, head of Asia FX strategy at CIBC Capital Markets. “We would also maintain a downside bias in GBP/AUD.”

RBA monetary policy and related commentary from members of the bank’s board has been a burden for the Australian throughout the last year including in recent weeks so if anything this Thursday’s testimony from the governor could be likely to support the Pound-Aussie rate.

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However, if this week’s rally in AUD/USD does continue it could potentially push GBP/AUD as low as 1.8679 over the coming days and would expose Sterling to the risk of a deeper setback in the event that the Australian Dollar rises above January’s high of 0.7315 against the U.S. Dollar.

“Markets have been long USD for months now, so it makes sense to expect a bit of a reprieve. There will be noise around the inflation number today, but this is really only tactical for now. Our preferred play is to remain long AUD/USD,” says CIBC’s Bennett, who tipped GBP/AUD for a fall to 1.8550 when writing in a Thursday market commentary.

The Pound to Australian Dollar rate tends to closely reflect the relative performance of AUD/USD and its Sterling equivalent GBP/USD but in a way that often leads GBP/AUD and AUD/USD to trade with a negative correlation, which is notably in light of recent and ongoing declines in U.S. exchange rates.

Further weakness in the U.S. Dollar and strength in Aussie exchange rates would likely continue to hobble the Pound to Australian Dollar rate.

Above: GBP/AUD at daily intervals and shown alongside AUD/USD. Fibonacci retracements of November rally indicating possible areas of support for Sterling. Black line represents 100-day moving-average for GBP/AUD.