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The pound-Australian dollar exchange rate is poised to extend its downtrend and test the 2026 low at 1.87.
Despite rising geopolitical tensions, the pound is only marginally higher against the Australian dollar on Monday.
Headlines out of the Middle East are downbeat on Monday and GBP/AUD trades slightly higher on the day at 1.8876; gains aren't inspiring any notion that the pound is about to stage a decisive comeback.
During the initial stages of the Iran crisis, GBP/AUD rose sharply as markets judged Australia to be highly exposed to the negative energy market implications of the war.
To be sure, any surprising deterioration in the Middle East situation could prompt GBP/AUD higher; with this in mind, the passing of Tuesday's ceasefire deadline offers a potential flashpoint.
If Trump doesn't extend the deadline, then GBP/AUD could rise to the downward channel line, which is located at approximately 1.90. We don't forecast gains to be particularly sizeable as all indications continue to point to the U.S. and Iran wanting to end this war.
Gravity will continue to draw the pound lower and GBP/AUD at 1.87 is more likely than not in the coming week.
AUD retains support thanks to a robust economy: even though it will suffer a hit due to the war it must be remembered that so too will the UK, Eurozone etc. Therefore, on a relative basis, Australia still looks well-positioned to outperform.
That outperformance should translate into the third interest rate hike at the RBA of the year, which should keep Australia's real yield advantage intact.
For AUD, that's supportive.
"The AUD remains the best performing G10 currency in the year to date. It is also the best performer in the month to date with the market continuing to chew over the prospects of a third 2026 rate hike from the RBA in May," says Jane Foley, Senior FX Strategist at Rabobank.
In the UK this week, traders will take into account UK Prime Minister Keir Starmer's appearance before Parliament on Monday afternoon, where he will answer questions about the latest developments in the Mandelson affair.
We reported last week that the British pound's outlook had dimmed as a new political flare-up raises the odds that Starmer will be replaced by a fiscally incontinent left-winger.
On Tuesday, Sir Oliver Robbins will give his account to MPs on how the appointment of Mandelson as U.S. ambassador played out, which should offer further intrigue. Robins was fired last week for allegedly keeping secret that Mandelson had failed security vetting ahead of his appointment to the role.
Despite this, Starmer will survive this latest chapter in the Mandelson saga as there are no challengers waiting in the wings to stage a coup and take the top job. That's wise: there's an inflationary and cost of living crisis coming down the line, and the Labour Party faces a battering in next month's local elections: challengers are better served by waiting.
For the pound, that's a small comfort.
We're also watching UK wage and employment data on Tuesday, although the impact should be muted due to the figures covering the pre-war period.
More interesting will be Wednesday's inflation prints as these will show the extent of the initial impact of the war. Surging fuel prices will come as no surprise, but we'll be interested to see if ex-fuel sectors of the economy raised prices.
If so, then there's a very real possibility that the UK faces another entrenched inflationary episode and the Bank raises interest rates in response.
That could offer the pound some support, although we'd be cautious of chasing it higher into a stagflationary episode of high inflation and low growth.