Australian Dollar clings to recovery gains vs retreating USD; Iran tensions cap upside

AUD/USD rebounds after touching a fresh monthly low amid a modest US Dollar pullback.
Geopolitical tensions could support the safe-haven USD and cap the risk-sensitive Aussie.
Inflationary concerns reaffirm Fed rate hike bets and contribute to limiting USD losses.

Haresh Menghani FXStreet

The AUD/USD pair stages a goodish intraday recovery from the 0.7120-0.7115 area, or a fresh monthly low touched earlier this Monday, and sticks to modest gains through the first half of the European session. Spot prices, for now, seem to have snapped a two-day losing streak, though the fundamental backdrop warrants some caution for bullish traders.

The US Dollar (USD) retreats from its highest level since April 7 as bulls opt to take some profits off the table following the recent rally witnessed over the past week or so, which, in turn, prompts some intraday short-covering around the AUD/USD pair. Any meaningful USD downside, however, seems limited on the back of persistent geopolitical uncertainties and rising bets for a rate hike by the US Federal Reserve (Fed).

In the latest developments surrounding the Middle East crisis, a drone strike caused fire at a nuclear power plant in the United Arab Emirates (UAE) while Saudi Arabia said that it intercepted three drones launched from Iraq. Adding to this, US President Donald Trump warned Iran on Sunday that the “clock is ticking” and that there “won’t be anything left” if action is not taken soon, adding that “time is of the essence.”

This raises the risk of a further escalation of the conflicts in the Middle East and dampens hopes for a US-Iran peace deal amid stalled talks, which should continue to underpin the safe-haven USD. Meanwhile, the US-Iran standoff lifts Crude Oil prices to a two-week high, reviving inflation fears and bolstering bets for a more hawkish US central bank. This could further support the USD and cap the AUD/USD pair.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent corrective decline from the highest level since April 2022, touched earlier this month, has run its course and positioning for further gains. In the absence of any relevant US economic releases on Monday, the USD price dynamics will influence the AUD/USD pair and produce short-term trading opportunities.

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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