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The pound faces the risk of a tactical pullback against the Australian dollar after reversing at its July high, although a narrowing Australian interest rate advantage keeps the broader trend in the pound’s favour.
The pound rose to 1.9363 against the Australian dollar on Wednesday, hitting almost to the pip the 1.9362 resistance level Pound Sterling Live had drawn at the July highs, before reversing to 1.9226.
The reversal leaves a long upper wick on the Pound to Australian Dollar exchange rate’s daily chart, a sign that buyers ran out of steam at the level.
Pound Sterling Live sees a risk the spike marks a blow-off top, opening the way to a tactical pullback if the pair records a negative daily close.
GBP/AUD daily chart.
GBP/AUD is down 0.16% on the day, following a rally from below 1.89 at the end of October.
A pullback would find initial support at the 21-day and 100-day moving averages near 1.9051 and 1.9043, with the 1.90 level beneath.
Any pullback would run against a supportive backdrop for the pound, with the Reserve Bank of Australia (RBA) signalling an end to its hiking cycle two days before the Bank of England is expected to raise interest rates for the first time in over three years.
The RBA raised its cash rate to 4.85% on Tuesday, its fifth hike this year, while Bank Rate in the UK stands at 3.75%.
Australia’s higher interest rates have supported the Australian dollar against the pound, as investors earn more holding Australian dollar deposits and bonds.
The Australian dollar risks losing that support if the RBA has concluded its hiking cycle and the Bank of England starts hiking again.
Analysts Expect the RBA to Hold From Here, With Cuts Pencilled In for 2027
Commonwealth Bank of Australia expects the RBA to keep rates on hold and pencils in 50 basis points of cuts in the second half of 2027, an outcome markets do not yet price.
“The implication is Australia’s interest rate advantage over the US will narrow, diminishing the tailwind for AUD/USD in coming months,” says the Australian bank, which expects two, and possibly three, further Federal Reserve hikes by March 2027.
The Australian dollar faces the same narrowing against the pound, with the Bank of England expected to lift Bank Rate to 4.00% on Thursday and money markets pricing around four UK hikes by mid-2027.
“Unless inflation surprises materially on the upside again, today’s move should mark the final increase of the current tightening cycle,” says UOB, the Singapore-based bank.
Governor Michele Bullock told reporters after Tuesday’s decision that “the last couple haven’t even started to flow through yet,” referring to the RBA’s most recent hikes.
RBA Inflation Forecasts Keep a Further Hike in Play
However, the RBA’s own forecasts show headline and underlying inflation staying above 3% until end-2027 and returning to the midpoint of its 2-3% target range only by mid-2028.
“Calling this the end of the tightening cycle may be premature,” says OCBC, the Singaporean lender, which notes the RBA “materially raised its inflation forecasts.”
Bullock also rejected suggestions that the RBA is done with hiking, telling reporters the central bank is “preserving our options.”
Futures market speculators have flipped from a big long Australian dollar position to a big short one in recent months, according to CFTC positioning data.
Traders holding those short positions must buy Australian dollars to close them, which can lift the currency once the selling is exhausted.
“In the slightly longer run, it feel as though the AUD could end up outperforming, despite the immediate reaction to today’s dovish hike,” says Kit Juckes, FX strategist at Société Générale.
Australia’s 5.1% bond yields look more attractive than the UK’s 5.25% given nominal growth above 5% and government debt below 50% of GDP, Juckes adds.
A Cautious Bank of England Would Add to the Case for a GBP/AUD Pullback
Investors will look to Thursday’s guidance from the Bank of England for confirmation that UK rates have further to rise, which would extend the narrowing in Australia’s rate premium.
“Market pricing of around four hikes by mid-2027 still looks rich to us. It would require more concrete evidence of broadening inflation risks,” says Henry Cook, an economist at MUFG, who expects one further hike in February to a 4.25% peak.
“If the Bank of England’s guidance on Thursday shows any hesitation about how much further they need to go, the pound could start looking vulnerable (though it is probably too early for them to give the appearance of slowing down),” says Société Générale’s Juckes.
Pound Sterling Live expects the pound to dip after the hike as the Bank declines to endorse the market’s rate path, although any setback should be shallow.
A Bank of England that declines to endorse further hikes would add weight to a GBP/AUD pullback towards 1.90 following Wednesday’s reversal at 1.9362.
