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Periods of pound sterling strength against the Australian dollar will be sold into.
The pound to Australian dollar exchange rate reached new multi-month lows last week and we expect more of the same in the coming days and weeks as a powerful downtrend remains intact.
The pair reached 1.8539 last week, the lowest value since June 2023, amidst ongoing demand for the high-yielding and commodity-intensive Australian dollar.
"The AUD continues to be helped by the Australian rates market pricing in further RBA rate hikes," says a weekly research note from Crédit Agricole.
Technicals are firmly in favour of further weakness, with GBP/AUD trading below the major moving averages and respecting clearly defined downtrend channels:
The old adage that "the trend is your friend" certainly applies in the case of GBP/AUD, which is an exchange rate that is purring along nicely and, dare I say it, predictably.
Underpinning Aussie dollar gains is a robust economy that is generating domestic inflationary pressures, which keeps the Reserve Bank of Australia (RBA) alert and ready to raise interest rates further, which underpins the currency's relative real interest rate advantage.
"Our economists see the Australian economy growing swiftly in 2026 and 2027, supported by a AUD $1.5 trillion capex pipeline spanning defence, energy transition, mining, data centers, and preparation for the Brisbane Olympics," says a mid-year research note from Morgan Stanley.
Consensus projections for the next four quarters, compiled from leading investment banks.
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Risks to the downside stem from the ongoing closure of the Strait of Hormuz, which is starving Asian countries of a regular supply of oil and gas.
For now, markets are rather sanguine about the situation, but of course, the risk is that this resilience unravels in the event of a multi-month closure of this critical shipping lane.
"With the US and Iran continuing their stand-off and investors remaining sanguine about the closure of the Strait of Hormuz; any signs that hostilities are resuming between the two countries would be a shock to risk and weigh on the Antipodean currencies," says Crédit Agricole.
While the AUD enjoys supportive tailwinds, the pound labours into fierce headwinds: politics is on the agenda again as Britain looks to change Prime Ministers in the near future.
The possible rise of Andy Burnham to Number 10 heralds major policy changes just two years after a new government took over. That uncertainty alone is enough to keep households and businesses wary, while financial markets price in additional risks.
Turning to the calendar, Tuesday sees the release of labour market and wage data, which traditionally helps inform the UK inflation debate. The rule of thumb is that above-consensus wages tend to boost the pound.
However, the UK labour market is steadily deteriorating, and any below-consensus wage or employment headlines could weigh.
Wednesday's inflation data are arguably more important as they will help determine whether the next move at the Bank of England is to raise interest rates.
CPI is expected to slide back to 3.0% y/y due to seasonal effects, before it rises towards 4.0% in later months.
That should mean the Bank of England considers raising interest rates again. For now, that dynamic is proving supportive of the pound.
Thursday sees the release of PMI data for May, which will give a first snapshot of how the economy did this month, and a consensus-beating outturn can set the pound up for a firmer end to the week.
Last week's above-consensus GDP reading of 0.6% q/q in Q1 was a timely reminder that it's quite easy to under-estimate the UK economy. It's why we would be open to further upside data surprises in the coming week.
