0.7050: Australian Dollar stuck in a range as Iran risks offset hawkish RBA

AUD/USD extends its sideways consolidation around 0.7050 through the Asian session on Thursday.
The RBA’s hawkish tilt lends support to the Aussie, while receding Fed hike bets undermine the USD.
Inflation risks due to the Middle East crisis limit the USD downside and cap the upside for spot prices.

Haresh Menghani FXStreet

The AUD/USD pair holds steady during the Asian session on Thursday and, for now, seems to have stalled the previous day's retracement slide from its highest level since June 5. Spot prices remain confined in a familiar range around 0.7050, awaiting a fresh catalyst before the next leg of a directional move.

The US Dollar (USD) struggles to capitalize on Wednesday's goodish rebound as signs of moderating inflation in the US temper bets on an immediate interest rate hike by the Federal Reserve (Fed). This, along with the Reserve Bank of Australia's (RBA) hawkish outlook, acts as a tailwind for the Australian Dollar (AUD) and the AUD/USD pair. In fact, RBA Governor Michele Bullock emphasized that upside risks to inflation persist and explicitly noted that the board is prepared to raise interest rates again if price pressures fail to show sufficient downward progress.

Investors remain worried about inflation risks stemming from volatile oil prices due to the US-Iran standoff. President Donald Trump said the US had total control over the Strait of Hormuz, even as Iran reiterated its own control over the vital waterway. This keeps geopolitical risks on the table, which acts as a tailwind for the safe-haven Greenback and caps the AUD/USD pair. Moreover, the recent range-bound price action around 0.7050 makes it prudent to wait for some follow-through buying before positioning for an extension of a one-and-a-half-month-old uptrend.

Moving ahead, the focus now shifts to the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims data. This, along with speeches from influential FOMC members, will drive USD demand later during the North American session. Apart from this, traders will take cues from further developments surrounding the Middle East crisis, which might continue to infuse volatility in financial markets and produce short-term trading opportunities around the AUD/USD pair.

AUD/USD daily chart

Technical Analysis

The AUD/USD pair keeps a mildly bullish near-term bias near the 100-day Simple Moving Average (SMA) at 0.7056. However, the lack of any meaningful buying interest warrants caution before positioning for any further gains. On the downside, a close below the 100-day SMA would negate the constructive tone and expose the recent lows near 0.7000/0.6950.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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