Sticky UK services inflation further reinforced the BoE on hold the rate in December, which further support the GBP. The AUD remains supported by resilient domestic consumption, a strong labor market, and cautious RBA policy, with no immediate rate cuts expected.

GBP: No rate cut in December

The GBP remains well-supported by a combination of stronger-than-expected domestic economic data and a less aggressive monetary policy outlook compared to its peers. October’s headline CPI inflation rose to 2.3% y/y, slightly exceeding expectations and the Bank of England’s recent projections. Core inflation also edged up to 3.3% y/y, underpinned by increases in household energy costs and resilient services inflation, which the BoE closely monitors. Services inflation, a key indicator for persistent price pressures, remained at 5.0% in line with the central bank’s forecast, suggesting no urgency for immediate rate cuts.

While market expectations for rate cuts have shifted, with the next move now anticipated in early 2025, the BoE’s cautious approach provides a supportive backdrop for the GBP in the near term. The UK's labor market also remains robust, with wage growth sustaining moderate inflationary pressures, adding to the case for the BoE to delay easing its monetary stance. The announced fiscal stimulus, equivalent to 1% of GDP, is expected to support domestic demand and further delay the need for monetary easing.

On the global stage, the UK’s relatively lower exposure to trade tariffs and its service-sector reliance provide additional resilience compared to the Eurozone, offering a positive divergence for the GBP. Structural improvements, including closer UK-EU ties, bolster the longer-term economic outlook, underpinning expectations for GBP strength in the coming quarters. While external factors such as a strong USD and geopolitical uncertainties may cap immediate gains, GBP/USD is anticipated to trend higher in the medium term, with EUR/GBP potentially moving lower as the policy gap between the UK and the Eurozone widens.

In summary, the GBP’s resilience is driven by domestic economic strength, fiscal support, and relative protection against global trade risks, presenting opportunities for GBP strength, particularly against weaker currencies in the near term.

AUD: Hawkish RBA

The AUD is likely to find support from resilient domestic factors, while external risks could act as significant headwinds. The RBA continues to emphasize a cautious and data-dependent approach, keeping monetary policy restrictive until inflation is sustainably within the 2-3% target range. The latest minutes suggest the RBA is unlikely to cut rates in the near term, with Australia’s four major banks projecting a first rate cut no earlier than February or May 2025. This restrained outlook is supported by steady domestic consumption and labor market conditions, which remain resilient despite global uncertainties.

Looking ahead, the market will closely monitor the Australia Monthly CPI data. Any resurgence in monthly CPI would reinforce the RBA’s recent hawkish stance and provide near-term support for the AUD. However, even if the Monthly CPI comes in lower than expected, it is unlikely to shift the RBA’s position to hold off on a December rate cut, as the Monthly CPI does not fully represent the comprehensive inflation picture in Australia. This nuance underscores the RBA’s reliance on broader data trends rather than isolated monthly fluctuations.

On the external front, potential global risks loom large. The possibility of Donald Trump’s re-election and renewed US-China trade tensions could trigger supply-side shocks, elevating inflation and disrupting global growth. Such tensions would likely impact China, Australia’s largest trading partner, weakening its growth and reducing demand for Australian exports. Additionally, increased US tariffs on Chinese goods could pressure Australian export prices. The AUD’s strong correlation with the CNY further amplifies its sensitivity to these geopolitical developments, exposing it to fluctuations tied to trade disputes.

In summary, while domestic fundamentals and inflation trends remain supportive, external challenges, including trade risks and China’s economic outlook, and geopolitical risk could limit AUD upside. The currency may find strength in the near term, particularly with supportive inflation data, but geopolitical headwinds are likely to temper sustained gains.

GBP/AUD 4H Chart

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