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Australian inflation data on tap this week.
The pound to Australian dollar exchange rate (GBP/AUD) is at 2.0477 at the time of writing and we think it remains vulnerable to weakness in the coming days and even a major change in trend.
The pair fell steadily through August and early September to print a low at 2.0342, from where it proceeded to recover to last Thursdasy's peak at 2.0552.
However, nothing in the price action from the past week suggests we are witnessing anything other than a pullback from that August-September drop, i.e. we're likely witnessing a mere consolidation ahead of the next leg lower.
Unless the exchange rate closes above 2.0496, we would view the pair as being vulnerable to falling below 2.0342 and ultimately relinquishing the longer-term multi-year uptrend.
Speaking of that longer-term trend, we are sitting on the 200-day exponential moving average at 2.0435, and if the exchange rate falls and records successive closes below here, the market will have flipped from an uptrend to a downtrend.
In short, the multi-year rise could be reaching its conclusion:
To be sure, the pair has fallen below here on a few occasions since 2023, but these episodes were brief and provided false signals. Nevertheless, it is taking a view that GBP is increasingly vulnerable to lower levels as we head into the final plays of 2025.
The Aussie's highlight of this week is Wednesday's monthly inflation figure, which could provide additional guidance as to whether or not the Reserve Bank of Australia (RBA) can cut interest rates again.
Last week's Aussie employment data was surprisingly weak, and there is a sense that an undershoot in the upcoming monthly inflation series could provide the RBA with the ammunition to cut rates once more.
The market looks for a reading of 2.8% y/y for August, which would be unchanged on September's print.
An undershoot would raise the bets of another cut and weigh on the AUD, which could keep GBP/AUD's head above that 200-day EMA we mentioned in our technical deliberations.
In the UK, Tuesday sees PMI data released, and the market expects the services PMI to come in at 53.6, which is consistent with a decent clip of growth for the private sector.
The rule of thumb, as always, is that anything above this would boost the currency, and anything below would weigh.
We would also look at the sub-components of the report, particularly inflationary and employment subcomponents. They should tell us whether the labour market continues to deteriorate (which could encourage further rate cuts at the Bank of England) and whether inflationary pressures remain high (which should encourage a more cautious approach).
The Bank of England left the base rate on hold last week, but signalled it was still prepared to cut interest rates again. In fact, there was nothing to really signify that it might be prudent to leave rates on hold until 2026 on account of still stubborn inflation.
For a market that was expecting something along these lines, the result was, on balance, a little 'dovish'. Markets raised the odds of another cut happening before year-end, which weighed on the pound.