AUD could be penalised by lower iron ore prices amidst geopolitical tensions centred on the Middle East. Image © Adobe Images.
The Pound is forecast to extend a recovery, but a decisive break is not guaranteed.
The Pound to Australian Dollar exchange rate (GBP/AUD) is in a phase of gains that should take it to 2.1035 in the next five-day stretch.
The chart shows that this level represents the upper end of the April-June range that has trapped GBP/AUD and kept a stranglehold on direction:
Above: GBP/AUD at daily intervals.
For now, we would expect the range to hold, meaning we aren't overly bullish on GBP/AUD's prospects, suggesting that it could ultimately retreat once 2.1035 is achieved. Any moves above here are likely to be faded, according to this expectation.
Part of the reason for this expectation is that Pound Sterling really isn't looking as perky as it once was, thanks to a string of weak domestic data prints of late.
Much of course will depend on what happens in the Middle East over the coming hours and days, with any notable deterioration in the conflict, which the U.S. joined over the weekend, liable to boost GBP/AUD further.
Here, a test of the 2025 high above 2.14 comes into play.
Samara Hammoud, an analyst at Commonwealth Bank of Australia, thinks the Aussie will be weighed down by the developments in the Middle East.
"A protracted conflict will weigh on metal prices and, in turn, AUD/USD. Iron ore prices, Australia's largest export, are particularly important for AUD/USD," she explains.
However, other opinions suggest a more complicated picture for the currency, with some saying spikes in oil and gas prices relating to the conflict might actually boost the AUD.
"Developments in the Middle East will continue to be a strong driver of the Antipodean currencies," says David Forrester, FX Strategist at Crédit Agricole. "Higher energy prices are also a support for the AUD given Australia is a large exporter of coal and LNG. Indeed, we think that while the AUD will underperform the safe-haven USD, it will continue to outperform most other G10 currencies on the back of higher oil prices."
Under such a scenario, AUD could keep GBP/AUD at bay.
Image © Adobe Stock
This week will be about how the conflict evolves, with traders now nervously awaiting Iran's retaliation.
The Iranian parliament on Sunday approved the closure of the Strait of Hormuz, through which about one-fifth of the world's oil flows, following the weekend bombardment by U.S. warplanes.
Iran's security body will now make the final decision on whether to proceed with the plan, state television reported on Sunday.
However, such a move risks alienating Iran's few allies, particularly China, which depends on oil from the Strait. It also risks alienating Gulf States who send their oil through the Strait.
Regardless, there is a sense of nervous anticipation as to what comes next, and this is keeping equity markets on tenterhooks. The Aussie Dollar is correlated to this sentiment, and will likely stay under pressure until markets see a roadmap towards the conflict's resolution.
?? In Australia This Week
Turning to the calendar, there is some interest for the currency in the coming week.
? Wednesday, 26 June
? Monthly CPI Indicator (May)
Previous (Apr): 3.6% YoY
Westpac Forecast (May): 3.8% YoY
Consensus Estimate: 3.8% YoY
? Key Details:
Expected 0.4% MoM rise, mostly due to fuel, rent, health, and education.
Core CPI is forecast to be 3.9% YoY, up slightly from April.
Non-volatile component inflation expected at 4.0% YoY (unchanged).
? AUD Implications:
A higher-than-expected CPI, especially if core inflation accelerates, could reinforce RBA tightening bias, supporting AUD.
A softer-than-expected CPI would boost rate cut expectations later in 2025, weighing on AUD.
? Broader Market Context:
RBA is in data-watching mode; CPI data are central to the interest rate outlook.
Westpac expects the RBA to stay on hold until May 2026.