Australian Dollar bulls seem hesitant near 0.7100 as USD recovers from two-month low

AUD/USD struggles to lure buyers as oil-driven inflation fears offer support to the buck.
The US-Iran standoff keeps the war-risk premium in play, further underpinning the USD.
The RBA’s hawkish tilt could support spot prices ahead of FOMC Minutes on Wednesday.

Haresh Menghani FXStreet

The AUD/USD pair turns lower following a modest Asian session uptick on Tuesday, awaiting a break below the 0.7100 mark before extending the previous day's retracement from the highest level since June 5.

The US Dollar (USD) gains some positive traction and recovers further from a two-month low, touched on Monday, as inflation jitters stemming from higher oil prices keep bets for at least one interest rate hike by the US Federal Reserve (Fed) on the table. Apart from this, the US-Iran standoff keeps the geopolitical risk premium in play and turns out to be another factor supporting the safe-haven Greenback, which, in turn, is seen acting as a headwind for the AUD/USD pair.

President Donald Trump said that the US is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday. Furthermore, Trump repeated his idea of declaring the critical Strait of Hormuz as a US territory and warned that he would target Oman if it hindered actions to reopen the strategic waterway. This comes as the Iran-backed Houthi rebels in Yemen escalated their campaign against Saudi Arabia, lifting oil prices to a two-week high.

Investors remain worried that higher energy prices would rekindle inflationary pressures and force the US central bank to adopt a more hawkish stance. USD bulls, however, might opt to wait for more cues about the Fed's future policy path. Hence, the focus will remain glued to the release of FOMC Minutes, due on Wednesday. In the meantime, the Reserve Bank of Australia's (RBA) hawkish outlook could act as a tailwind for the Australian Dollar (AUD) and the AUD/USD pair.

Strategists at Rabobank highlight that Governor Bullock moved swiftly to counter the market’s initial dovish interpretation of the RBA’s latest decision, stressing that the Board had actively considered both holding and raising rates. They note that Bullock underscored the ongoing tightening bias by stating that another increase remains “quite possible”.

AUD/USD daily chart

Technical Analysis

The AUD/USD pair keeps a constructive bullish tone above both the 100-day Simple Moving Average (SMA) at 0.7063 and the 200-day SMA at 0.6943. The pair is also trading above the 50.0% Fibonacci retracement of the May-June decline, at 0.7068, suggesting that the recent pullback has so far been a correction within an ongoing advance.

On the topside, immediate resistance is seen at the 61.8% Fibo. retracement at 0.7116, followed by a stronger barrier at the 78.6% retracement at 0.7184, where upside momentum could be tested.

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

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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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