Australian Dollar climbs as softer US data, improving risk sentiment weigh on USD

AUD/USD trades around 0.7060 on Wednesday at the time of writing, up 0.20% on the day. The pair benefits from broad-based US Dollar (USD) weakness as investors react to softer-than-expected US economic data and improved risk sentiment driven by the latest geopolitical developments.

The US Dollar remains under pressure, with the US Dollar Index (DXY) down 0.16% on the day, trading around 99.70 at the time of press. Market participants reacted to weaker-than-expected labor market data after the ADP Employment Change report showed that private-sector employment increased by 44K jobs in July, below the market forecast of 70K and following a 98K increase in June. Meanwhile, the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) came in at 54.1 in July, slightly below expectations of 54.5. Although the services sector continues to signal expansion, the Employment Index fell to 47.4, highlighting softer hiring conditions.

The Greenback is also weighed down by reports that the United States (US) has lifted selected Iran-related sanctions, removing restrictions on two aircraft and three airlines linked to the Islamic Revolutionary Guard Corps (IRGC). The move is seen as a potential de-escalatory step as negotiations involving the US, Oman and Iran continue to advance. Separate reports also suggest that a draft agreement between Iran and Oman has already been finalized and is awaiting final approval from Tehran.

On the Australian Dollar (AUD) side, investors remain focused on expectations surrounding the Reserve Bank of Australia (RBA) monetary policy decision on August 11, which is expected to remain the main driver of the Aussie in the near term. The Australian Dollar's upside may remain capped as markets have significantly scaled back expectations of another Reserve Bank of Australia (RBA) rate hike. According to the ASX RBA Rate Tracker, the chance of a rate increase has fallen from 43% on July 24 to just 3% currently.

Aussie edges higher as AUD/USD extends recent gains

Analysts at Commerzbank highlight that AUD/USD continued to grind higher, with the pair having "rose 50 pips to 0.7050," underscoring the Australian Dollar’s constructive tone against the USD in recent trading.

Strategists at Scotiabank add that, even as “uncertainty persists about the status of US/Iran talks, keeping oil prices firm,” the “broader risk mood looks positive, with global stocks mostly higher and high beta FX generally firm.” In this environment, Scotiabank notes that the AUD gains "support of firmer domestic yields.”