Australian Dollar bulls retain control amid US-Iran diplomacy efforts, hawkish RBA
- AUD/USD stalls the previous day’s modest pullback from the 0.7200 neighborhood.
- The Israel-Lebanon ceasefire and Iran diplomacy hopes underpin the risk sentiment.
- The hawkish RBA also supports the Aussie, albeit a modest USD uptick caps gains.
The AUD/USD pair holds steady above mid-0.7100s during the Asian session on Friday and for now, seems to have stalled the previous day's modest pullback from its highest level since June 2022. Spot prices remain on track to register strong weekly gains amid a supportive fundamental backdrop.
The announcement of a ceasefire between Israel and Lebanon fuels hopes for a US-Iran peace deal and remains supportive of the upbeat market mood. This, along with the Reserve Bank of Australia's (RBA) hawkish outlook, continues to act as a tailwind for the Aussie. In fact, RBA Deputy Governor Andrew Hauser said earlier this week that the central bank is focused on preventing any lift in medium-term inflation expectations, reaffirming bets for further policy tightening in 2026. The current market pricing suggests a 65% chance of a rate hike in May, which, in turn, is seen as a key factor supporting the AUD/USD pair.
Meanwhile, Finance Ministers from the Group of Seven (G7) emphasized the urgent need to limit the economic repercussions of an ongoing Middle East conflict. Furthermore, the instability in the Strait of Hormuz keeps a lid on the optimism led by potential US-Iran peace talks. This assists the safe-haven US Dollar (USD) in preserving the previous day's modest recovery gains from its lowest level since late February and might cap the AUD/USD pair. Hence, it will be prudent to wait for some follow-through buying before positioning for the resumption of the pair's uptrend witnessed over the past three weeks or so.
Any meaningful USD appreciation, however, seems elusive in the wake of diminishing odds for a rate hike by the US Federal Reserve (Fed). Traders might also refrain from placing aggressive directional bets and opt to wait for another round of talks between the US and Iran, possibly this weekend. Nevertheless, the aforementioned supportive fundamental backdrop suggests that the path of least resistance for the AUD/USD pair is to the upside, and any corrective pullback is more likely to be bought into. Traders now look forward to speeches from influential FOMC members, which will drive the USD and provide some impetus.
Australian Dollar FAQs
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.
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.
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.
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.
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.
