Australian Dollar edges higher amid modest USD weakness; upside potential seem limited

AUD/USD gains some positive traction as USD remains depressed amid softer US bond yields.
Middle East jitters and the hawkish Fed could help limit deeper losses for the safe-haven buck.
Receding RBA rate hike bets could cap the Aussie, warranting some caution for bullish traders.

Haresh Menghani FXStreet

The AUD/USD pair edges higher during the Asian session on Friday, looking to build on the overnight bounce from the lower boundary of the weekly range amid a softer US Dollar (USD). Spot prices, however, lack bullish conviction and currently trade above mid-0.6900s, up just over 0.10% for the day.

President Donald Trump said on Thursday that the US will not resume military strikes on Iran before the November 3 midterm congressional election, keeping a lid on crude oil prices and easing concerns over runaway inflation. Adding to this, a 30-year bond auction met with solid demand and triggered a corrective decline in US Treasury yields, which keeps the USD depressed below an 18-month top and acts as a tailwind for the AUD/USD pair.

Meanwhile, the geopolitical risk remains in play amid the US-Iran standoff over Tehran's nuclear program. In fact, state media, quoting Iran's head of the Atomic Energy Organization, Mohammad Eslami, reported that the country will not stop uranium enrichment or give up its uranium stockpile. Furthermore, the intensifying fighting between the Iran-backed Houthis in Iran and Saudi Arabia could offer some support to the safe-haven Greenback.

Adding to this, the US Federal Reserve's (Fed) hawkish stance could limit deeper USD losses and cap the AUD/USD pair amid receding bets for another interest rate hike by the Reserve Bank of Australia (RBA). This warrants some caution for bulls and makes it prudent to wait for strong follow-through buying before positioning for an extension of the pair's recovery from the 0.6900 neighborhood, or its lowest level since early July, touched last week.

AUD consolidates as UOB downplays scope for sustained downside

Strategists at UOB Group note that their previous expectation for AUD/USD to “edge higher within a 0.6965/0.6995 range” was upended when the pair slipped to a low of 0.6943. However, they stress that “despite the relatively rapid decline, there has been no clear increase in downward momentum, and a sustained decline in AUD is unlikely.” In the near term, UOB now looks for the Aussie to “trade in a range between 0.6935 and 0.6975,” suggesting a period of consolidation rather than an extension of the latest pullback.

AUD/USD 4-hour chart

Technical Analysis

The AUD/USD pair keeps a bearish near-term tone beneath the 100-period Simple Moving Average (SMA) on the 4-hour chart and a dense Fibonacci band overhead. Spot prices remain capped first by the 23.6% retracement at 0.6983, with the 38.2% level at 0.7032 reinforcing the idea of limited upside while the broader downswing from the 0.7237 high stays in play. On the downside, initial structural support emerges at the cycle low at 0.6905, where buyers may attempt to slow the decline.

(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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