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Australian dollar's strong run against the pound might be fading.

A favoured bet amongst strategists at the dawn of 2026 was to buy the Australian dollar against the pound, and what a play it's turned out to be:

The GBP/AUD exchange rate has fallen 5.83% this year by the time of writing, but at one stage earlier this week, that gain was closer to 6.75%.

But the scale of the move isn't the whole story: for traders, the nature of the decline was near-perfect as GBP/AUD fell at a consistent and near-rythmic pace within a well-defined channel.

But, the trend is faltering and strategists at Société Générale are happy to book profit on a successful call, saying "our short GBP/AUD recommendation has yielded nearly 6% in a few weeks and the time has come to close it."

That's not to say the pound isn't vulnerable to further losses, as Soc Gen notes the pound is vulnerable to higher oil prices and is suffering from a deteriorating economic outlook, with very limited fiscal room for manoeuvre and a current account deficit that averaged 2.7% GDP over the last year.

But a look at the chart above shows that further GBP weakness might come in a more haphazard fashion.

As can be seen, the pair is breaking out of the downsloping channel and looking to consolidate.

Sterling is better supported across the board, largely thanks to the uplift in short-term UK bond yields, which are an important determinant of the currency's value.

Ironically, that has the war to thank. The Iran conflict has sent oil and gas prices materially higher which has understandably lifted Britain's inflationary outlook.

Economists warn this closes the window on further Bank of England rate cuts: last week two rate reductions were predicted, now there's just one: 

The shift is reflected in higher short-term UK bond yields, which is of benefit to pound sterling.

The Australian dollar has benefited greatly this year from the RBA's interest rate hike, and bets that it will hike again. But rising UK yields eat into the Aussie yield advantage, in turn arresting GBP/AUD's decline.